Ask an accountant: RRSPs

Francesca Giroux, CGA
For the Lakeside Leader

What is an RRSP, and how does it impact my personal income taxes? An RRSP is a retirement savings plan that is registered with the Canada Revenue Agency (CRA). You, your spouse or your common-law partner can set-up and can make contributions to the plan, and these contributions can be used to reduce income tax. The amount that you can contribute for a given year is provided on your notice of assessment or reassessment from the previous taxation year.

Un-deducted RRSP contributions (within your contribution limit) can be brought forward and deducted on a subsequent tax return. You can over-contribute to your RRSP if you want, but only to a maximum of $2,000 over your contribution limit. Anything in excess is subject to a tax of 1 % per month.

The income (e.g. interest) generated through an RRSP is non-taxable for the period of time that the funds remain in your RRSP plan; however, when funds are withdrawn, your RRSP is cashed in, or you receive payments from the plan you have to pay taxes on these amounts. Taxes withheld depend on the amount withdrawn. For amounts from $0 up to $5,000 10 per cent is withheld, over $5,000 up to $15,000 20 per cent is withheld and for amounts over $15,000, 30 per cent is withheld. The taxes being withheld from your RRSP may not be enough to cover additional amounts owing depending on your tax bracket. It is important to contact your CPA if you have concerns about whether the amount of tax withheld from your RRSP withdrawal will be enough to cover taxes owing.

In addition to contributing to your own RRSP, you can contribute to a spousal or common-law partner RRSP. These contributions must also fit within your contribution limit. Withdrawals from the spousal plan are included in your spouse’s income, but be careful, withdrawals within 3 years of any spousal plan contributions may result in some or all of the withdrawal taxed to the contributor and not the spouse.

Spousal RRSP’s allow individuals to split retirement savings more evenly, especially for individual’s whose spouses have a lower income and thus a lower deduction limit. The contributor benefits from the tax deduction in the short term, while the spouse who is likely to be in a lower tax bracket in retirement will receive and report the income on their tax return.

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Information provided is of a general nature. As each individual or company’s situation is unique, you may wish to consult with your CPA for information specific to your own needs.

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