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

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Publish Date: February 26, 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 4 of 4

RRSP related Tax Documents

When you contribute to an RRSP, the Bank issues RRSP Receipts. When you withdraw from the RRSP Account, the Bank issues a T4RSP Slip. For the payments out of an RRIF Account, the bank issues a T4RIF Slip. There are other tax related RRSP forms. For instance, T1-OVP is a form relevant when there is an over-contribution made to RRSP.

Withdrawal from RRSP Account vs. Transfer of RRSP Account from one Bank to another Bank

If you are in need of funds, you will be able to withdraw from RRSP Account, depending upon the type of Account and the Investments made using the RRSP Savings. Withdrawal from RRSP can attract tax, dependant on the overall tax situation. If you want to move your RRSP from one bank to another bank, you can transfer the account from one bank to the other, without attracting tax. But, do not withdraw from the first bank account and then deposit the money in the other bank where you want the account to be. If you do, this would be treated as an RRSP withdrawal and can attract tax.

What happens upon the death of a Spouse who has an RRSP Account?

RRSP of a spouse, upon his/her death, generally is rolled over to the surviving spouse. Such rolled over RRSP is not taxable in the hands of the surviving spouse at the time of the roll over. This RRSP becomes taxable when the surviving spouse withdraws from the rolled over RRSP.

What is the importance of becoming 71 years of age, regarding RRSP?

Lumpsum withdrawal from RRSP, Purchase of Annuity or Conversion to Registered Retirement Investment Fund (RRIF)

On or before the last day of the year in which you become 71 years of age, you have certain options. Either withdraw the RRSP as lumpsum or purchase an annuity or convert the balance in the RRSP Account directly into a Registered Retirement Investment Fund (Source: CRA Publications). In other words, the RRSP Account is not going to be a 'savings' account anymore, instead it will be an Annuity Account or an Investment Account. Careful planning well ahead of this time is needed to minimize the tax implications of this withdrawal / purchase / conversion. Help from appropriate professionals is needed for this. Otherwise, you will end up paying taxes which could have been otherwise either avoided or minimized.

Keeping RRSP Limits unused for years, in order to take advantage of payouts by way of Retiring Allowance or Severance Pay

Some people purposely and others unknowingly would not use their available RRSP limits, over the years. As a result of this, the yearly Limits keep accumulating into a larger limit. When a person who practices this, is laid off or takes an early retirement, will have the advantage of depositing the big payout of the Retiring Allowance, into an RRSP. This may be a good strategy from a certain point of view. However, the drawback of this is the uncertainty of life and the ever-changing life situations. What happens if this person is not laid off as he previously thought? Or he did not take an early retirement? Then, these people may regret for not contributing to an RRSP and making it grow over those years.

If the RRSP Limit is not used up in a meaningful way, the very same Limit can be used to make substantial savings later when a real need for Limit arises. Such a real need may arise when you receive a big pay out upon your retirement or the termination of your job.

Some strange conducts of a few Taxpayers

Save in RRSP in one year and withdraw from RRSP in the next or following year(s)

There are some people who make RRSP Contribution in one year and then withdraw the same amount or a different amount from their RRSP in the next year or in any of the following years. If the two years - one year of contributing and the other year of withdrawing, are considered as a 'period', then the Net Savings in RRSP is either zero or close to zero during that 'period'. This could be considered as 'wasting' of one's RRSP Limit. Is this a good strategy or planning? It is hard to say whether it is a good idea or it is not a good idea, unless the whole situation of the taxpayer is known. One instance where such a strategy might be somewhat justified, is when a person receives a big income in one year and in the next year there is an exceptional decline in income. However, one thing needs to be kept in mind. When a person contributes to his RRSP, his RRSP Limit is used up. Once a part or entire RRSP Limit is used up, whatever limit is used, is gone forever. The limit that is used, will never be available again to the taxpayer. In order to get more Limit, you need to have 'earned' income again. Therefore, if you are one of those people who resort to this practice, you need to think twice, whether this is a good strategy or plan. I need to make a note on this subject. If the RRSP Limit is not used up, in a meaningful way, the very same Limit can be used to make substantial savings later when a real need for Limit arises. Such a situation is often found when a person is either laid off or retires and there is a big payout by way of Severance Pay or Retiring Allowance. It may be a good idea not to waste the RRSP Limit when there is no real advantage to it, such as if it is not really needed or cannot be productively used, and if there is the potential of a big payout coming in the near future.

Are you one of the rare people who withdraw from RRSP, while there is a tax refund waiting for them from one or more past years that they have not filed their tax returns for?

I do not think that any financial planner will ever endorse such a practice. What this category of people doing is, keeping their over-due tax refund with the Government and depleting their own valuable RRSP savings. Who will endorse this, other than those that have the habit of procrastination? Filing your own and your businesses' tax returns should be done on an ongoing and timely basis, unless there is a perfect justification to delay filing of the tax return(s).

Employer-matched RRSP

Some employers set up an RRSP for their employees. It is common to see both the employee and the employer participate is this kind of RRSPs. One thing to remember in this is, when the employer contributes to your RRSP, it is your RRSP Limit that is being used. Employees who participate in this kind of RRSPs, also need to take extra care not to exceed their limit, if they want to make RRSP Contributions in addition to what they contributed to the employer-matched RRSPs. If you are not currently in an employer-matched RRSP, then you may request your employer to consider one, provided the employer is doing well in his/her business and you are a valued employee. Remember, all bi-lateral programs must be a win-win setting, otherwise, it will not last for want of fairness.

What should be the Ultimate Goal?

The ultimate goal should be to maximize your wealth. This can happen only if your investments in various accounts, including RRSP Accounts, actually grow. Consider this hypothetical case. If all the RRSP and Non-RRSP savings (other than TFSA) are invested in one particular kind of investment, then there is a greater chance for investments in RRSP Accounts to grow, much more than the investments in the other Non-RRSP Accounts (other than TFSA). This is for the reason that the income generated within the RRSP Account is tax-sheltered, until it is withdrawn.

Take advantage of:

rational planning strategies,
tax deferral opportunities,
grow your savings in a tax-sheltered manner,
plan when to withdraw the money and how, and
withdraw the money as is planned and enjoy your life.

No matter whether you save in RRSP or in TFSA or in other types of accounts, the endeavour should be to generate income and make the savings grow. if the original investment is going to sit as such for years or decades, without growing, then what is the special advantage of saving? Think about all these factors and use your own wisdom and the wisdom of the people around you. Make the future good for you, for your family and also for the community around you.

Good Luck to everybody!

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.