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RRSP, PART 2: COMPLICATIONS AND TAX IMPLICATIONS

RRSP season is behind the door. Many of you will wonder how to proceed with RRSP: buy, not to buy, how much to buy, what if….and list goes on. I explained before what is an RRSP and some tax consequences in my previous tax news and this is an addition to what I already wrote. This time I focus on withdrawals from RRSP, Home Buyers Plan (HBP), Life Learning Plan (LLP) and Spousal RRSP.

To recall, I wrote about the following in part 1

–          What is RRSP
–          Deduction limit
–          Impact of contribution on taxes
–          Excess contribution
–          Deductibility of Interest charges / Investment counseling fees
–          Spousal RRSP
–          Withdrawal from RRSP

Following queries from my clients and friends, I am adding more information about RRSP, particularly on Withdrawal from RRSP, Spousal RRSP, HBP and LLP.

If you are 71 or over

You can contribute to your RRSP until December 31 on the year you turn 71. However, if your spouse is younger (less than 71 yrs old) and you still generate earned income, you can still contribute to a spousal RRSP and claim the tax deduction.

Three-year rule

If within 3 calendar years of your last contribution to the spousal RRSP, your spouse withdraws money from the spousal RRSP, the amount withdrawn will be treated as your income in your personal tax return. However if the withdrawal is made after the 3 calendar years, then the money withdrawn will be included in the spouse personal tax return. Note that there are exceptions to the rule.

Withholding taxes on RRSP withdrawn

For amount withdrawn up to $5,000, the withholding rate is 10%

For amount withdrawn up to $15,000 and more than $5,000, the withholding rate is 20%

For amount withdrawn above $15,000 the withholding rate is 30%

Home Buyers Plan (HBP)

You, as an RRSP contributor, can withdraw up to $25,000 without being subject to a withholding tax to buy a house. You should satisfy the first-time home buyer’s conditions. You are then given a 15-year period to pay back the money you borrow from your RRSP.

 

If you have at least $25,000 in your RRSP and you have contributed to the spousal RRSP (at least $25,000), both you and your spouse can withdraw up to $25,000 each to purchase your home without tax withholding.  Both of you must meet the first-time home buyer’s conditions. If you were living together with your spouse in a home which he/she owns, this will disqualify you as a first-time home buyer. Any withdrawal from the RRSP to purchase a home will be subject to withholding taxes and will be included in the income for tax return purposes.

 

You must have contributed the amount to the RRSP at least 90 days prior to withdraw the money for HBP purposes.

Lifelong learning plan (LLP)

You can borrow up to $20,000 from your RSSP to pay for training or education using the LLP. The maximum you can withdraw each year is $10,000. The repayment of the LLP doesn’t have to start until 5 years after the first withdrawal. You are then given a 10-year period to pay back the money you borrow from your RRSP.

 

As a bonus, I am summarizing for you three common RRSP mistakes that Tim Cestnick  have identified  in Globe & Mail newspaper  dated January 9th, 2014.

Mistake No 1

Jack has sold stocks in 2013 and have realized capital gains. So he need some capital losses in order to offset the gains. He picked some stocks that have dropped in value and transferred them to his RRSP portfolio as a contribution in-kind.  He thought that the capital losses created will offset the capital gains. Transferring of a stock to RRSP is considered to be a disposition at fair market value, however the capital losses will be denied. What he should have done is sold the stocks, create the capital losses to offset the capital gain, and then use the proceeds from the sale to buy RRSP. Hence he will be able to claim the capital losses and use RRSP contribution to reduce his taxable income.

Mistake No 2

You can combine your regular RRSP with your spousal RRSP. Once combined, the entire RRSP plan becomes Spousal RRSP. The rules with regard to withdrawal from a spousal RRPS applies. If the intention of combining them was to withdraw money, then pay attention to the 3 year rules. The rule can be voided if the combination was done because of a separation or divorce.

Mistake No 3

Michael lent his spouse money so that she can contribute to her RRSP (note that it is not spousal RRSP). Canada Revenue Agency considers RRSP to be a property. So Michael is lending her money to buy a property. Here attribution rules will apply when she withdraw money from her RRSP. This mean that the money withdrawn will be considered as income in Michael’s tax return. To avoid this situation, Michael should have contributed to a SPOUSAL RRSP and make sure the withdrawal is not subject to the 3-year rule or Michael could have simply lent her the money against the prescribed rate to avoid the attribution

 

If you need help or know someone who might need help, please do not hesitate to contact me.

Please see the disclaimer before making any decisions. 

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