Registered Retirement Savings Plan (RRSP) - Part 3 of 4

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Publish Date: February 20, 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 3 of 4

RRSP - Savings Accounts and Investment Accounts

We all want our savings to grow year after year. If we keep our money in ordinary savings accounts, it can grow only in a limited manner. Banks offer a very limited rate of interest on savings accounts. It is at this point that the question as to how to significantly grow the savings comes up. How can the saved money be grown? The simple answer is, to 'invest'. How can you choose these investments? That is where the role of an Investment Advisor within your 'Team', comes in to play. You need an excellent investment advisor with a proven track record. Otherwise, either your savings will not grow or it may be reduced or even lost.

RRSP Accounts may be Savings Accounts or Investment Accounts. RRSP Savings Accounts can earn only the interest that the Bank offers on such accounts. Though small, these may generate a guaranteed return, less risk, and more security. RRSP Investment Accounts may have the ability to add more value to the originally contributed amounts because they can be used to invest in stocks or securities. However, as risk and return go hand in hand, there is also a chance of either getting a reduced return than the Savings accounts, or losing the investments partly or entirely. Generally speaking, the Savings Accounts have a lower risk and lower return, and the Investment Accounts have a higher risk and possibility for a higher return.

Self-Directed RRSP and Other RRSPs

Self-directed RRSPs are managed by the account holder. If a taxpayer is planning to manage the RRSP by himself/herself, very good care should be taken in the investment decisions. Whether you are an experienced investor or you are somebody who just started to learn the intricacies of investment, keep in mind, it is the savings for your retirement. Therefore, extreme care must be taken in the 'self-direction' of your investment.

If the account holder does not want to manage his/her own RRSP, this function can be entrusted to the banks for professional investment and fund management decisions. Even if you entrust a professional fund manager, what is stated in the above paragraph, applies in this case as well. Why? It is still your retirement fund and if you do not have sufficient oversight in these investment decisions by 'professional investment advisors', if something goes wrong, it may be too late. Money once lost, can seldom be recovered. Therefore, entrusting the management of your RRSP account to professional third parties, does not mean that you can blindly trust those managers and relax. Instead, you should be vigilant. It is your hard-earned money, and it should be available for your retirement.

Qualified RRSP Investments - What to be aware of and what to be beware of

You need to ensure that your RRSP savings / investments really are 'Qualified Investments' for RRSP purpose and not part of a 'scheme'. My personal opinion is this. Irrespective of whether you manage your own RRSP savings / investments or you engage a qualified manager to invest your RRSP Savings, caution is needed, to make sure that the investments are 'Qualified Investments' for RRSP purpose. If an individual has non-qualified investments in RRSP, there will be a 'tax'. (Source: CRA Publication). In reality, such a 'tax' acts as a penalty against investment in non-qualified investments in RRSP.

RRSP Loans

Banks may grant specific Loans to their customers, in order to help them make the RRSP contributions, if they really need the funds. Let us assume that a taxpayer has a $20,000 RRSP Limit and he borrowed $20,000 from a bank and makes the RRSP Contribution. When the Personal Tax Return is filed, he gets an additional tax refund of say, 30% ($6,000) of the RRSP contribution. This additional tax refund is solely as a result of the RRSP contribution made. This person can immediately pay back $6,000 towards the bank loan. His loan balance is now only $14,000 ($20,000-$6,000). If this person had no money of his own or if he did not take the RRSP Loan, to contribute $20,000, he would not have been able to get the additional refund of $6,000 in that year. In this case, the interest payable on the RRSP Loan also has to be taken into account. The loan should be repaid as soon as the taxpayer is able to. If he / she is not in a financial situation to repay the loan, they should not borrow in the first place. Loans carry interest and interest will accumulate if it is not repaid on time. If the borrowed money is paid back before the next year's RRSP deadline, you may take advantage of this process again.

The above example is not intended to encourage borrowing. Only your RRSP 'Team' can be sure whether an RRSP loan is a good idea in your circumstance. Your team of professional advisors can help determine whether an RRSP Loan in your particular situation is advisable or not, taking into consideration the interest rates, your debt ratio, credit scores etc. They should also compare interest rates of the RRSP loans to other credit facilities that you may qualify for, and help you make the right decision.

Withdrawals from RRSP

Generally, when you contribute to RRSP within the specified time period and within your limit, you become entitled to claim a deduction from your taxable income. By the same token, when you withdraw from RRSP, the withdrawn amount is added to your other income and taxed. There are certain exceptions to this rule.

1. Withdrawal under the Home Buyer's Plan (HBP)

This Plan allows you to withdraw amounts from certain RRSP Accounts (except for locked-in or group RRSPs), without it being part of your taxable income. In order to claim this, you need to be a qualified home buyer and you are buying or building a qualified home and subject to certain conditions. Currently the maximum that you can withdraw under this Plan is $35,000. The withdrawn amount under this Plan needs to be paid back to your RRSP Account within a period of 15 years, starting from the second year after the year of the withdrawal. For example, if you withdrew funds in 2023, your first year of repayment is 2025. If you do not contribute back to the RRSP Account that year's minimum repayment amount, the amount will be added to your income of that year.

It is a great option to have your Registered Retirement Savings available as down payment for your first home purchase.

2. Withdrawal under the Lifelong Learning Plan (LLP)

Similar to the HBP, this Plan allows the RRSP Account holder to withdraw amounts from his/her RRSP, subject to certain conditions. Currently the maximum amount that can be withdrawn is $10,000 in a calendar year, up to a maximum of 4 years and up to a total amount of $20,000. This amount has to be used for the full-time education or training for yourself or for your spouse. The withdrawn amount under this Plan needs to be contributed back to your RRSP Account within a period of 10 years, starting from the fifth year after the year of the withdrawal. For example, if you withdrew funds in 2023, your first year of repayment is 2028. If you do not contribute back to the RRSP Account that year's minimum repayment amount, the amount will be added to your income of that year.

Is it not great to have your Registered Retirement Savings available for your learning or training as well? This is very important in the modern times, when a person has to change his/her profession or trade, quite a few times to keep pace with the changing job market.

The Money Trail - Actual Source vs. the Assumed Source of Money

If a taxpayer has already used up or set aside his/her income for other purposes, then the real source of money for the RRSP contribution, may be coming from past savings, loans, inheritance or gifts which are not already in these RRSP or TFSA Accounts. Some people may even withdraw from their TFSA and deposit in the RRSP Account and vice versa. For example, a taxpayer has $50,000 in net take-home salary and he spent all that money during the year. When the time comes to contribute to his RRSPs, there is no money remaining. He may take an RRSP loan from the bank and make the RRSP contribution. Thus, in this case, the real source of money used for the RRSP contribution is a loan. However, when the time comes to file his tax return, the contribution made is deducted from the taxable income of that year, which in this case, has already been spent on other things. This is what we see if we track the real money trail. However, irrespective of the real source from where the money is taken to save in RRSP or TFSA, the following are the general assumptions for the purpose of taxes.

Savings or Contributions to RRSP is assumed to have come from un-taxed Income.
Savings or Contributions to TFSA is assumed to have come from the Income which is already taxed.

Therefore, what is considered here is not the real source from where the RRSP or TFSA actually is contributed.

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.