Spousal RRSP – Mechanics and Benefits
Spousal RRSP’s can help shift future income from a
higher income spouse to a lower income spouse. This can provide
a tax savings when the receiving spouse cashes in his or her
RRSP’s. It also may reduce the clawback of the Old Age
Security pension for the higher income spouse, and allow the
receiving spouse to qualify for the pension income tax credit.
Provided no withdrawal is made from spousal plans for at
least two calendar years after the year of your last contribution
to any spousal plan , the amount withdrawn will be taxed in
your spouse's name.
Look into spousal RRSP’s – you could reduce your
taxes now and in the future.
The Institute of Chartered Accountants of Alberta provides
information for RRSP Tips as a public service.
Tax Savings from an RRSP
Here are three rules of thumb for 2004 RRSP deductions:
• If your income is $32,183 or less, a $1,000 RRSP
would reduce your 2003 taxes by about $260.
• If your income is between $32,184 and $64,368, a $1,000
RRSP would reduce your 2003 taxes by $320.
• If your income is $64,369 or more, a $1,000 RRSP would
reduce your 2003 taxes by $360 to $390.
Look into the amount you can save with an RRSP today.
The Institute of Chartered Accountants of Alberta provides
information for RRSP Tips as a public service.
Borrowing to Make an RRSP Contribution
Yes, you can borrow to make an RRSP contribution, but any
interest you pay on the borrowed money will not be tax deductible.
For this reason, it is generally better to use available
cash rather than borrowing. If you have to borrow to make
the contribution, try to repay the loan as soon as possible
to minimize the amount of non-deductible interest. Before
borrowing, seek professional advice to ensure the benefits
of making an RRSP contribution outweigh the costs of borrowing.
If you hold investments outside of your RRSP, it would be
more appropriate to borrow to acquire these investments, as
the interest on such borrowing would likely be deductible.
The Institute of Chartered Accountants of Alberta provides
information for RRSP Tips as a public service.
Withdrawals from RRSP
Provided the funds are not in a non-redeemable investment
or a locked-in RRSP, you may withdraw any portion of your
RRSP at any time.
In most circumstances, you will pay tax on the amount withdrawn
from an RRSP as it is considered income in the year you make
the withdrawal.
When you make your withdrawal, the financial institution
will withhold 10-30 per cent for taxes. You'll get a credit
for the tax withheld when you complete your tax return for
the year. You may owe additional tax at that time, or be entitled
to a refund of part or all of the tax withheld, depending
on your marginal tax rate and other tax withheld for the year.
The Institute of Chartered Accountants of Alberta provides
information for RRSP Tips as a public service.
Early Contribution to RRSP
It's a great idea to contribute to an RRSP each year, especially
if you are young and a long way from retirement. It is advisable
to contribute early in the year so you start the tax-free
compounding of earnings within the RRSP earlier. Also consider
monthly payments into an RRSP throughout the year.
Once made, contributions within your deduction limit, or
to an excess of $2,000, can be carried forward indefinitely,
without penalty, for deduction in future years. This could
be a substantial advantage if you claim the deductions in
years when you will be in a higher tax bracket.
For your RRSP contribution to be deductible for a particular
tax year, the deadline is the 60th day of the following year.
For the 2004 tax year, the deadline is March 1, 2005.
The Institute of Chartered Accountants of Alberta provides
information for RRSP Tips as a public service.
Foreign Property Limitations
When you invest in an RRSP, only 30 per cent of the total
cost of all the assets in your plan can be invested in foreign
property. This limit applies to each individual RRSP. Foreign
property includes such things as shares and debt obligations
of companies listed on most foreign stock exchanges, and debt
obligations of certain foreign governments.
The 30 per cent limit is based on the cost of the assets
when they were purchased. This means that if you invest $1,000
in an RRSP, the foreign property limit is $300. Even if the
assets rise in value, the foreign investment limit is still
based on the original cost of the assets. Thus, even with
a market value of $1,500, the foreign property limit would
still be $300.
Each time you sell or purchase a Canadian asset, the foreign
percentage of your plan can change. Be careful when you sell
a Canadian asset that it does not leave you over the foreign
property limit.
The Institute of Chartered Accountants of Alberta provides
information for RRSP Tips as a public service.
Implications of Over Contributions to RRSP
An excess contribution is calculated as the total of all
of your undeducted RRSP contributions, minus your current
RRSP deduction limit and an allowable over-contribution of
$2,000. Excess contributions are subject to a 1 per cent per
month penalty until they are withdrawn. With prior Canada
Revenue Agency approval, you can generally withdraw the excess
without taxation.
Keep in mind that the penalty situations are complex. Consult
the advice of a professional.
The Institute of Chartered Accountants of Alberta provides
information for RRSP Tips as a public service.
Who is eligible to contribute to RRSP’s?
Anyone with “earned income” subject to Canadian
taxation, including non-residents, may contribute to an RRSP.
You can make part or all of any RRSP contributions to a plan
in your spouse's name. You, as the contributor, are still
entitled to the tax deduction.
For this purpose, a spouse refers to a legal married partner
or a common-law partner of the opposite or same sex with whom
you have cohabited for the last 12 months.
To maximize your long-term tax savings, there should be an
attempt to “equalize” the retirement income of
both spouses. Therefore, RRSP contributions should always
go into the name of the spouse who will otherwise have the
lower income in retirement.
The Institute of Chartered Accountants of Alberta provides
information for RRSP Tips as a public service.
RRSP limits
When determining how much you can contribute to RRSP’s,
keep in mind there is at least one more step to the calculation
for members of Registered Pension and Deferred Profit Sharing
Plans.
Ordinarily, your deductible contributions to RRSP’s
are limited to 18 per cent of your prior year's earned income,
to a maximum of $14,500 for 2003, $15,500 for 2004, $16,500
for 2005 and $18,000 for 2006.
If you're a member of a Registered Pension Plan or a Deferred
Profit Sharing Plan, this amount is reduced by the pension
adjustment amount(s) reported on your prior year T4 slips.
A pension adjustment reflects the value of the future benefit
you are entitled to as a result of being a plan member for
the year. Your 2004 RRSP deduction limit will be on your 2003
Notice of Assessment.
There may be other adjustments to your RRSP deduction limit
if there have been significant changes to your Registered
Pension Plan coverage during the year.
The Institute of Chartered Accountants of Alberta provides
information for RRSP Tips as a public service.
Earned income and your RRSP
Your maximum RRSP deduction is based on your earned income
in the previous year and unused contribution room from prior
years. What is considered earned income?
Common forms of earned income include income from employment,
your unincorporated business, and net rental income. Losses
from these sources reduce earned income. Your earned income
is increased by any taxable alimony or maintenance you receive
and reduced by any deductible alimony or maintenance you pay
during the year.
Earned income does not include investment income (such as
capital gains, interest and dividends) or retirement income
(such as RRIF income, old age security and Canada Pension)
except certain disability pensions.
The Institute of Chartered Accountants of Alberta provides
information for RRSP Tips as a public service.
Is there a good time to use the money in an RRSP?
One of the objectives of tax planning with RRSP’s is
to contribute in years when you are subject to high tax rates,
and withdraw the funds when you are in a lower tax bracket.
One such opportunity could arise in the first year in which
you become self-employed, when your income is minimal as a
result of start-up costs, or is deferred as a result of tax
planning. For example, if you are commencing a business in
2004, you could contribute $10,000 to your RRSP by March 1,
2004, deduct it on your 2003 tax return, and receive a tax
refund. You could then immediately withdraw the $10,000 from
your RRSP, include it in your 2004 income, and pay little
or no tax as a result of having little or no other income
in the year. The total tax saving could be as much as $4,370,
depending on your income in each year.
If you are planning to start a business, consider the short-term
saving of a well-timed RRSP contribution.
The Institute of Chartered Accountants of Alberta provides
information for RRSP Tips as a public service.
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