PL BHOLAH & CO. INC

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RRSP, PART 1: TAX IMPLICATIONS

Registered Retirement Savings Plan (“RRSP”) is a retirement savings plan for employees and self-employed people. You or your spouse or common-law partner can contribute to the plan. It does has many restrictions like maximum contributions, maximum deductions to calculate taxable income, timing of the contributions, the assets that are eligible to be under RRSP, withdrawal as well as some tax implications. Any income you earn in the RRSP is usually exempt from tax as long as you keep the money in the plan. Below are some points that I believe you should be aware of.

Deduction limit 
Every individual has a RRSP deduction limit each year. The limit is provided to you in you Notice of Assessment or Notice of Reassessment issued by Canada Revenue Agency (”CRA”).

Impact of contribution on taxes

For every dollar you contribute to RRSP, it can be used to deduct your taxable income, hence you end up paying less taxes. However, if per our planning we find it more beneficial for you to deduct none or only a portion of the  RRSP contribution, then the portion that is not deducted will be carried forward (next years). The carried amount can be deducted in the later years.

Excess contribution = penalty
If you contributed more than your limit, the undeducted contribution in excess of the sum of the RRSP deduction limit is subject to a tax of 1 % per month. This tax is not deductible when calculation your taxable income.

Interest charges 
If you borrow money and invest in RRSP, the interest charges are not deductible when calculating your taxable income.

Investment counselling fees
If your RRSP funds is being administered and you pay investment counselling fees related to investment in these plans, the fees are not deductible when calculating your taxable income.
Spousal RRSP

Any RRSP that is registered with the individual’s spouse/common-law/partner as annuitant and to which the individual has made a contribution, is considered to be a SPOUSAL RRSP. Keep in mind that when the individual make the RRSP contribution to the spouse/common-law/partner existing RRSP, the spouse/common-law/partner’s plan becomes a SPOUSAL RRSP. When the individual make an RRSP contribution to the spouse/common-law/partner, the contribution will be deductible in the individual tax return, not in the spouse/…. tax return.  If the taxpayer is not eligible to contribute to RRSP because his/her plan has been collapsed, the taxpayer can still contribute to the spousal RRSP

E.g.  Taxpayer = A; spouse = B
RRSP deduction limit for A = $4,000
RRSP deduction limit for B = $10,000

A can contribute to his/her RRSP + to the spousal…RRSP for a total contribution of maximum $4,000. The taxpayer cannot contribute more than his/her limit.
Withdrawal from RRSP
Withdrawal from RRSP is taxable during the year in the hand of the taxpayer who withdraws the money. – Exceptions are (item 11 & 12)

  • * If the withdrawal qualifies for Home Buyers Plan (HBP), then  it is tax-free withdrawals
  • * If the withdrawal qualifies for Lifelong Learning Plan (LLP), then  it is tax-free withdrawals
  • * If withdrawal is from Spousal RRSP, then it is complicated.  Let me know if you have questions.

This is for general knowledge only, it is not meant for decision making. I bear no responsibility for any actions you might take following the above. Anyone who would like to know more, please do not hesitate to contact me.

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