A Registered Retirement Savings Plan or RRSP is a type of Canadian account for holding savings and investment assets. Introduced in 1957, the RRSP’s purpose is to promote savings for retirement by employees. It must comply with a variety of restrictions stipulated in the Canadian Income Tax Act. Rules determine the maximum contributions, the timing of contributions, the claiming of the contribution tax credit, the assets allowed, and the eventual conversion to an RRIF (Registered Retirement Income Fund) in retirement. Approved assets include: savings accounts, guaranteed investment certificates (GICs), bonds, mortgage loans, mutual funds, income trusts, corporate shares (stocks), foreign currency and labour-sponsored funds.
RRSPs have five effects:
- Taxes on earned (employment) income (to the extent contributed to the plan) are deferred until the eventual withdrawals from the plan. There is no benefit from the deferral because it is an accrued liability that grows at the same rate as the investments themselves. The tax deferred is commonly called the contribution tax credit.
- Income earned inside the plan on the after-tax savings (excluding the contribution tax credit) is not taxed either while within the plan or on withdrawal. Asset classes that attract the highest taxes (%income* %tax rate) are best kept within the plan to maximize the deferral benefit.
- One’s marginal tax rate when withdrawing cash may be higher (or lower) than the rate at which one claimed the original contribution credit. This creates a penalty (or benefit) equal to: ( Change in tax rate % ) divided by ( 1 minus tax rate on contribution ).
- Canada has a variety of programs available to retired people whose benefits decrease as one’s income increases. By deferring the income until retirement, the additional income created at that time may reduce those benefits.
- Claiming the contribution tax credit may be deferred until a later year (when the expected marginal tax rate is higher), but there is a penalty for the delay. The penalty equals the income the tax credit would have earned during the delay.
What is a RRIF?
A Registered Retirement Income Fund (RRIF) is an account designed to provide retirees with a source of income after they have retired. Usually a RRIF is comprised of the funds that roll over from an RRSP, as an RRSP cannot be kept after the age of 71. The capital and interest in a RRIF accumulates tax-free, but is subject to tax upon withdrawal. Persons with an RRIF can withdraw any amount of money from the fund at any time, but any amount over the minimum will be subject to various degrees of withholding tax. The funds in a RRIF can only be sourced from another RRIF, an RRSP or another pension plan.
What Funds can make up an RRIF?
RRIFs can be comprised of multiple types of investments such as mutual funds, GICs, stocks, and simple annuities. Since the 2005 budget, there are no limitations on foreign content in an RRIF. Many banks recommend an account with laddered GICs, where one matures every year, but while these present guaranteed safety, they do not provide a large enough growth of capital for many investors.
What is the Advantage of a RRIF?
The interest in a RRIF is allowed to grow tax free. Because the capital in a RRIF is almost entirely made up of rolled-over RRSP funds that have not been taxed, withdrawals from a RRIF are taxed as income. However, once in retirement, the beneficiary is most likely in a lower tax bracket. Furthermore, it is possible to calculate the minimum withdrawal amount according to the age of the beneficiary’s spouse, which is desirable if the beneficiary’s spouse is younger, and thus eligible for lower minimums. Lower minimums are desirable when the beneficiary has other accumulated funds to live off of, and wants to maintain the funds in his RRIF.
What are some Risks Associated with RRIFs?
Because an RRIF is designed to provide a regular source of income, quickly withdrawing funds is difficult. Any funds withdrawn beyond the minimum withdrawal amount (see calendar below) are subject to withholding tax. If you are in a position where it is quite possible that you will require a large portion of the capital in your RRIF all at once, an RRIF may be undesirable unless other, non-RRIF funds are in your portfolio.
Can a RRIF be taken out before age 71?
Yes. An RRIF can be started as early as 55. Starting at age 65, the beneficiary can withdraw $2,000 tax-free dollars each year until age 71 if they are not receiving any pension income.
How do RRIF Payouts Work?
Pension Income Deduction
Minimum Annual Withdrawal (%)
Minimum Annual Withdrawal (%)
- If you are in the highest tax bracket, and the minimum RRIF payments are more than you need, consider using them to pay the interest cost on an investment loan. If this strategy can be employed for many years, the returns can be quite substantial.
- Consider taking out a Life Insurance policy to help cover the costs (taxes) of the transfer of your estate to your heirs. In turn, use of an investment loan or aggressive equity strategy can help cover the costs of the insurance.
- Always consult your accountant before making any plans for your retirement
How an RESP works
The subscriber (or a person acting for the subscriber) generally makes contributions to the RESP. Subscribers cannot deduct their contributions from their income on their tax return. If not paid out to the beneficiary, the contributions are usually paid by the promoter to the subscriber at the end of the contract. Subscribers do not have to include the contributions in their income when they get them back.
The promoter usually pays the contributions to the beneficiaries. Income earned on the contributions is paid to the beneficiaries in the form of educational assistance payments (EAPs). Beneficiaries include the EAPs, but not the contributions, in their income for the year in which they receive them from the RESP.
The Canada Revenue Agency registers the education savings plan contract as an RESP, and lifetime limits are set by the Income Tax Act on the amount that can be contributed for each beneficiary. Unless the RESP is a specified plan the RESP must provide that no contributions (except transfers from another RESP) may be made to the plan at any time after the end of the year that includes the 31st anniversary of the opening of the plan. Furthermore the plan has to be completed by the end of the year that includes the 35th anniversary of the opening of the plan,
unless it is a specified plan.
Here is an overview of how an RESP generally works.
- A subscriber enters into an RESP contract with the promoter and names one or more beneficiaries under the plan.
- The subscriber makes contributions to the RESP. Government grants (if applicable) will be paid to the RESP. These grants can be the Canada Education Savings Grant, Canada Learning Bond, or any designated provincial education savings program.
- The promoter of the RESP administers all amounts paid into the RESP. As long as the income stays in the RESP, it is not taxable. The promoter also makes sure payments from the RESP are made according to the terms of the RESP.
- The promoter can return the subscriber’s contributions tax-free.
- The promoter can make payments to the beneficiary to help finance his or her post-secondary education.
- The promoter can make accumulated income payments.
A registered education savings plan (RESP) is a contract between an individual who is the subscriber, and a person or organization, who is the promoter. The subscriber (or a person acting for the subscriber) makes contributions to the RESP, which earns income. The subscriber names one or more beneficiaries and agrees to make contributions for them.
The Registered Disability Savings Plan (RDSP) helps Canadians with disabilities and their families save for the future. If you are a Canadian resident under age 60 and are eligible for the Disability Tax Credit (Disability Amount), you are eligible for an RDSP. Earnings accumulate tax-free, until you take money out of your RDSP. Parents or guardians may open an RDSP for a minor. With written permission from the holder, anyone can contribute to the RDSP.
Canada Disability Savings Grant
Through the Canada Disability Savings Grant, the Government deposits money into your RDSP to help you save. The Government provides matching grants of up to 300%, depending on the amount contributed and the Beneficiary’s Family Income. The maximum is $3,500 each year, with a limit of $70,000 over your lifetime.
Canada Disability Savings Bond
Through the Canada Disability Savings Bond, the Government deposits money into the RDSPs of low-income and modest-income Canadians. If you qualify for the bond, you could receive up to $1,000 a year from the Government, with a limit of $20,000 over your lifetime. Contributions do not need to be made to the RDSP in order to receive the bond.
Enhancements to the RDSP
As of January 2011, you are allowed to carry forward unused grant and bond entitlements for a 10-year period preceeding the opening of the plan. See Carry Forward Entitlements. As of July 2011, the proceeds from a deceased parent’s or grandparent’s Registered Retirement Savings Plan, Registered Retirement Income Fund and Registered Pension Plan can be rolled over into the RDSP of a financially dependent child or grandchild with a disability.
Repayment of Canada disability savings grants (CDSGs) and Canada disability savings bonds (CDSBs)
What repayment is required when a disability assistance payment (DAP) is made from the plan?
When a DAP is made from the plan, any CDSGs and CDSBs paid into an RDSP in the preceding 10 years must be repaid to Human Resources and Skills Development Canada (HRSDC).
What change has the budget proposed to this repayment requirement?
For DAPs made after 2013, the budget proposes to introduce a proportional repayment rule. This rule will require that, for each $1 withdrawn from an RDSP, $3 of any CDSGs or CDSBs paid into the plan in the 10 years preceding the withdrawal be repaid, up to a maximum of the assistance holdback amount. In general terms, the assistance holdback amount is the total amount of CDSGs and CDSBs paid into an RDSP within the last 10-year period, less any part of that amount that has been repaid to HRSDC.
Minimum and maximum disability assistance payments
What change has the budget proposed to the minimum payments from all RDSPs?
For 2014 and subsequent years, the budget proposes to establish a minimum annual withdrawal requirement for all RDSPs once a beneficiary attains 60 years of age. Under this new rule, the total amount of withdrawals made in a year may not be less than the maximum lifetime disability assistance payment (LDAP) amount for that year.
What change has the budget proposed related to the maximum payments from a primarily government assisted plan (PGAP)?
For 2014 and subsequent years, the budget proposes to increase the maximum annual limit for withdrawals from PGAPs to the greater of the following amounts:
- the maximum lifetime disability assistance payment (LDAP) amount for that year; and
- 10 per cent of the fair market value of plan assets at the beginning of the calendar year.
Rollover of registered education savings plan (RESP) investment income
What rollover changes has the budget proposed for RESPs?
For transfers that are made after 2013, the budget proposes to allow investment income earned in an RESP to be transferred on a tax-deferred (rollover) basis to an RDSP in certain circumstances if the plans have a common beneficiary.
Under what conditions can the tax-free rollover be made?
To qualify for the tax-free rollover, the beneficiary must meet the existing age and residency requirements in relation to RDSP contributions. As well, one of the following conditions must be met:
- the beneficiary has a severe and prolonged mental impairment that can reasonably be expected to prevent the beneficiary from pursuing post-secondary education;
- the RESP has been in existence for at least 10 years and each beneficiary is at least 21 years of age and is not pursuing post-secondary education; or
- the RESP has been in existence for more than 35 years.
What are some of the consequences of a rollover?
When an RESP rollover occurs, contributions in the RESP will be returned to the RESP subscriber on a tax-free basis. As well, Canada education savings grants and Canada learning bonds in the RESP will be required to be repaid to HRSDC and the RESP terminated by the end of February of the year after the year during which the rollover is made.
Is the amount transferred into the RDSP considered a contribution?
The amount of RESP investment income rolled over to an RDSP may not exceed, and will reduce, the beneficiary’s available RDSP contribution room. The rollover amount will be considered a private contribution for the purpose of determining whether the RDSP is a PGAP, but will not attract CDSGs.
How is the transferred amount treated when it is withdrawn from the RDSP?
The rollover amount will be included in the taxable portion of withdrawals made to the beneficiary.
Termination of an RDSP when a beneficiary is no longer eligible for the disability tax credit (DTC)
What changes has the budget proposed to the termination requirements when a beneficiary is no longer eligible for the DTC?
The budget proposes to extend the period for which an RDSP may remain open for a DTC ineligible beneficiary when an election is made by the RDSP plan holder after 2013.
A medical practitioner must certify in writing that the nature of the beneficiary’s condition makes it likely that the beneficiary will, because of the condition, be eligible for the DTC in the foreseeable future.
A beneficiary of an RDSP became DTC ineligible in 2011. How do these rules affect the RDSP?
If the RDSP has not yet been terminated, the RDSP will not be required to be terminated until the end of 2014. Plan holders of such RDSPs may extend the period for which the RDSP may remain open if they obtain the required medical certification and make an election before 2015.
Under the new rules, how is an election made?
The RDSP plan holder will be required to elect in prescribed form and submit the election, along with the written certification, to the RDSP issuer. The RDSP issuer will then be required to notify HRSDC that the election has been made. The election must be made by December 31 of the year following the year the beneficiary became ineligible for the DTC.
How long will the RDSP be extended?
An election will generally be valid until the end of the fourth calendar year following the first calendar year for which a beneficiary is DTC ineligible. The RDSP must be terminated by the end of the first year for which there is no longer a valid election.
What happens if the beneficiary’s condition changes and the beneficiary is once again eligible for the DTC?
If a beneficiary becomes eligible for the DTC while an election is valid, the usual RDSP rules will apply commencing with the year for which the beneficiary becomes eligible.
What rules apply to the RDSP while an election is valid and the beneficiary is not eligible for the DTC?
Where an election is made, the following rules will apply commencing with the first year for which the beneficiary is DTC ineligible:
- no contributions to the RDSP will be permitted, including the rollover of RESP investment income; however, a rollover of proceeds from a deceased individual’s registered retirement savings plan or registered retirement income fund to the RDSP of a financially dependent infirm child or grandchild will still be permitted;
- no new CDSGs or CDSBs will be paid into the RDSP;
- no new entitlements will be generated for the purpose of the carry forward of CDSGs and CDSBs;
- withdrawals from the RDSP will be permitted and will be subject to the proposed proportional repayment rule and the proposed maximum and minimum withdrawal rules;
- if a beneficiary dies after an election has been made, the existing 10-year repayment rule will apply; and
- the assistance holdback amount will be equal to the amount of the assistance holdback amount immediately preceding the beneficiary becoming DTC ineligible less any subsequent repayments.