Registered Retirement Savings Plan (RRSP) - Part 1 of 4

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Publish Date: January 30, 2023

Important Information and Disclaimer

The matters mentioned in this Article and three related Articles thereafter, are only general in nature, in broader terms, in brief and cover only limited topics related to RRSP. There could also be exceptions to what is covered in these articles by the Author. Each person's tax and finance situations are different and may be unique. Therefore, only your Accountant/Financial Planner/Advisor and other relevant professionals can provide you with the right advice. The only intention for these series of articles is to invoke a new interest in the readers to start thinking in a different way and to seek advice from the appropriate qualified professionals, including but not limited to an Accountant, Financial Planner, and Investment Advisor who have a proven track record in this specific area. DO NOT act solely based on these articles, caution to readers is advised. The Author of these articles and the publishers will not be responsible for the consequences of any actions, of whatsoever nature, of the readers or anybody else. Wherever a singular term is used or a reference to a certain gender is made, it is used only as a representative of the general public. Wherever the term 'Bank' is used, it may include designated Financial Institutions as well.

For the preparation of this article, the Author referenced relevant publications of the Canada Revenue Agency (CRA). This does not mean that the accuracy of the article is assured by the CRA. Opinions expressed are solely that of the author.

Part 1 of 4

RRSP is one of the subject areas that has both supporters and opponents. This may be due to the fact that it affects three main realities of life - Taxes, Savings and Investments. When these three areas are affected, it would affect the life of the taxpayer especially when he/she is living on a limited income. Some of the aspects of RRSP and related matters are well structured/controlled, while the others depend on a number of factors, such as the taxpayer's personal considerations, philosophy, intentions and expectations, the very uncertain nature of life itself, economic and market conditions, players in the related fields, market forces and so on. In short, this is a very complex and vast subject matter. Only a part of the whole is covered in these articles.

There are some taxpayers who are in favour of RRSPs and they regularly contribute to an RRSP. There are other taxpayers who are not in favour of RRSPs at all and do not contribute to an RRSP. There is yet another set of taxpayers who are not aware of various aspects of RRSPs and some of them contribute to an RRSP anyway, while the rest of them do not. The series of Articles is intended to highlight some of the aspects of RRSPs.

For a taxpayer (we shall call this taxpayer, 'A'), what could be good news? Definitely, it is the news that he can make some savings in taxes.
For the same above taxpayer, after he takes advantage of all the tax-saving opportunities, then what would be the next best news? For a lot of taxpayers, it could be an opportunity to defer (delay) the payment of taxes on a part of their income that is saved for retirement. For the rest of the taxpayers, they may prefer to pay tax on their entire income in the current year and move on.
For the same above taxpayer, after he takes advantage of all the tax-savings and tax deferral opportunities, what would be the next best news? It could be an opportunity to defer the payment of tax on the income generated from the money originally saved for his retirement, as in 2 above.

If you are a taxpayer like A in the above scenarios, then, this series of articles is for you. If you are not, but you have an open mind to hear arguments of the other side, then this series of articles is for you as well.

What is RRSP?

For those taxpayers who make contributions (savings) subject to their entitled Annual Contribution Limit to designated accounts, are allowed to deduct such contributions from their taxable income, provided the amount of such savings is kept in specified/designated accounts with authorized Institutions. In other words, your taxable income can be reduced up to the amount you contributed to the RRSP account or up to the amount of unused and deductible RRSP Contributions that you have, which ever is less.

Savings is a habit of people. It is optional, depends upon the mindset of the individual and a number of other factors. Contributing to RRSP inculcates a habit of savings in the life of a taxpayer.

If you are in a higher tax bracket and you don't think that your income after retirement is not going to be high, then RRSP contributions may be an option. For instance, if you are paying taxes at the marginal tax rate of 30%, and you think that your income after retirement would be taxed only at the marginal tax rate of 20%, then it may be better for you to contribute to an RRSP. Seek professional help to determine whether you should.

In order to get the optimum benefits from the whole scope of taxation concerning Retirement Accounts and other Savings Accounts, an ordinary taxpayer needs the help of a team of at least three professionals - Personal Financial Planner, Accountant and Investment Advisor. In fact, this should be a joint effort to a certain extent, in order to be successful. All these professionals, not only should have the required qualification, but also should have a proven track record of quality results. The Personal Financial Planner is the right person to tell you what the maximum amount that you may save in your RRSP can be, in your given circumstances. Your Accountant would be the one to tell you how much of the RRSP Contributions will be the ideal to claim as a Deduction from your Income in the relevant year. Your Investment Advisor would be the one who can tell you what kind of investment(s) that you may invest your RRSP savings in. Finally, you are the one to make the decision in each of these three areas. You have the authority to disregard these professionals, especially if you have a valid and rational reason to do so.

Why do we need Savings?

Part of our income needs to be saved, preferably on an ongoing and consistent basis. Why do we need to save? It is the Savings that you can safely and soundly use as the down payment for your dream home, provide a cushion for untoward events in the future, if any, provide peace of mind to a certain extent against the uncertainties of life, provide the seed capital for growth and development, for lifestyle improvement, for updating or renovating or replacing your capital assets that wear and tear over the years, provide for retirement life and so on. Personally, I will not recommend any savings plan, without you first paying for all your necessities and also for a little bit of luxuries of life. Luxuries vary from person to person, while necessities may not vary much between people. How can a person save, if his/her bare necessities of life are not even met? Savings start after meeting the necessities of life.

What are the Important Features of RRSP?

Generally speaking, these are the features of RRSPs.

When a taxpayer makes a valid Contribution to his/her RRSP, he/she becomes entitled to claim a deduction up to that Contribution from his/her taxable income in the relevant year or later. When Contributions are made, they can be deducted from taxable income. Income of a person which represents the Contributions made to RRSP Accounts, is taxed when it is withdrawn from the RRSP account.
When there is income accrued or received within the RRSP Account, such income is not taxed at the time of accrual or receipt. Instead, such income is taxed when that income is withdrawn from the RRSP Account. The entire income so received within the RRSP Account is able to be re-invested within the account and able to be grown further and further. The idea behind the RRSP is that when a person has higher income, save a part of it, get some tax savings in that year or later, grow the savings in a tax-sheltered manner, withdraw it during the years after retirement or during the years when there is no or less income, thus keep the tax on such withdrawal at lower levels. In theory, this a very noble concept, however, to put this into practice it requires extreme care and teamwork.

What is the Logic (Intention) behind RRSP?

The concept of RRSP is commonly referred to as Tax Shelter. The original amount of Contributions to the RRSP Account as well as the income earned on such original Contributions (on Contributions saved or invested amounts) can grow without being taxed right away, which otherwise would have been taxable if such growth happened outside the RRSP Account. The growth within the RRSP Account is tax-sheltered as long as the funds remain in the designated account. The idea behind all these, is that the amounts in the RRSP Account are expected to be withdrawn during the taxpayer's retirement, when he/she may have a reduced overall income. During that time, if the overall income is less, that taxpayer may have the advantage of paying taxes at a lower tax rate.

What is the deadline to make a RRSP Contribution?

The deadline for taxpayers to make RRSP Contribution is 60 days from the end of the relevant tax year. Accordingly, the deadline to make Contribution for the Tax Year 2022, is March 1, 2023. If you intend to make an RRSP Contribution for the Tax Year 2022, that needs to happen before the end of the day on March 1, 2023. All contributions made after this date will be available to be deducted from Income only for the tax year 2023 or later years.