RRSPs or also known as a Registered Retirement Savings Plan were introduced in 1957 to help Canadians save for a comfortable retirement. RRSPs are an investment vehicle registered with the Canadian government which allow you to defer paying tax on money deposited into it. When you contribute into an Registered Retirement Savings Plan, you get a tax deduction for the amount contributed which reduces your taxable income for the year. The greater your tax rate, the greater your tax savings. For example, if you contribute $5,000 into your RRSP, your income will be lowered by $5,000 and thus resulting in tax savings to you.

Contributing into an RRSP

Anyone who has “earned income” such as employment earnings can contribute to an RRSP – up until December 31st of the year they turn 71.  Earned income may also include self-employment income, CPP/QPP disability payments, and net rental income.  Keep in mind that there are limits of how much you can contribute each year to your RRSP.

Maximum Contribution Limits

The allowable RRSP contribution limit for the year is the lower of:

• 18% of your earned income for the previous year, or
• the maximum contribution amount for the current tax year: $27,230 for 2020

Example: Jim is making a salary of $57,000 for 2019. For 2020, he has earned contribution room of $10,260. ($57,000 x 0.18% = $10,260).  If Jim has carry forward room, he may contribute over this amount.

• Note: If you’re a member of your company’s pension plan such as Defined Benefit Plan or Defined Contribution Plan, your pension adjustment will lower your RRSP contribution room. 
• Note: If you’re part of a Deferred Profit Sharing Plan and contributing, your pension adjustment will also lower your RRSP contribution room.
• Past Service Pension Adjustments (PSPA) and Pension Adjustment Reversals (PAR) will also affect your contribution room. PAR may arise when a taxpayer terminates their RPP or DPSP.

Determining Contribution Room

The easiest way to confirm your Registered Retirement Savings Plan contribution room is to look at your Notice of Assessment to which the CRA sends to you when you file your taxes or visit your CRA Account.  Alternatively, an individual can do it manually by taking into account their current contribution limit.

Example: Calculating Contribution Room for $2020

Current Contribution Limit
Minus (-)
Pension Adjustment for 2019 
Plus (+)
Pension Adjustment Reversal for 2020
Minus (-)
Past Service Pension Adjustment for 2020
Plus (+)
Carry forward Contribution Limit
Plus (+)
Over contribution allotment of $2,000

Minimum Age Restriction Contributions

There is no minimum age to contribute to an Registered Retirement Savings Plan. As long as the taxpayer has “earned income” and files a tax return, they may be able to set up and contribute to an Registered Retirement Savings Plan.

Maximum Age Restriction Contributions

An account holder is allowed to make Registered Retirement Savings Plan contributions up until the end of the year that they reach age 71. After age 71, the RRSP must be converted into a Registered Retirement Income Fund, also known as a RRIF. You may also purchase an annuity. If you have a spouse and they’re younger than you, you’re allowed to open a Spousal Registered Savings Plan and take advantage of tax benefits after the age of 71 by contributing into the spousal RRSP, pending you have contribution room. Contribution room can be generated if the taxpayer continues to work after 71.

Carry Forward Room Contributions

Taxpayers who aren’t able to maximize their Registered Retirement Savings Plan contribution room are allowed to carry the unused portion forward indefinitely, up until 71 when it’s usually converted into a RRIF.

Example: If you had available contribution room of $8,000 in 2018, $5,000 in 2019 – in 2020, you’re allowed to  contribute $13,000.

Contribution Deadline 

It’s important to keep in mind the contribution deadline in order to take advantage of the tax benefits that RRSPs provide. To take advantage of the tax savings for the current year:

• An individual can contribute into their RRSPs in the current year and up to 60 days after the end of the year.
  • For Example: Joe decided to hold off contributing into his RRSP for 2019 until February 14th, 2020. Joe is eligible to receive a tax benefit for 2019.

Over Contribution Penalties

A tax payer is allowed to over contribute up to $2,000 above their available room without any penalties. If you have excess contributions above this amount, there is a 1% per month penalty.  It’s important that you withdraw this excess amount as soon as possible.

If you are aware that you over contributed into your RRSP, you must fill out the Individual Tax Return for RRSP, PRPP, and SPP Excess Contributions form. You must complete it and send it to the CRA. The applicable tax must be due within 90 days after the calendar year in order to avoid late fees and interest. If you fail to pay within 90 days, the CRA will penalize you:

• 5% of your balance owing
  plus
• 1% of your balance owing for each month that your tax return is late, to a maximum of 12 months

Withdrawing from an RRSP

Ideally, funds from RRSPs/RRIFs are meant to be withdrawn when you’re in retirement and at a much lower tax bracket than when you were when the funds were contributed into the account.  With an Registered Retirement Savings Plan, an account holder would have three types of withdrawal options:

1. Regular Withdrawal
2. Home Buyers’ Plan Withdrawal
3. Lifelong Learning Plan Withdrawal

Regular Withdrawal

Withdrawals from RRSP are generally discouraged as when you withdraw, you have to pay withholding tax plus you permanently lose the contribution room that you withdrew. You cannot re-contribute the amount that was withdrawn and must earn new contribution room.

Withholding Tax on Withdrawals 

Withdrawals from Registered Retirement Savings Plan are immediately subject to withholding tax. The withholding tax rate is detailed in the table below. Please note that withholding tax rates are different in Quebec.

Example: Jamie plans to withdraw $5,000 from his RRSP. Jamie will be paying 10% withholding tax which is $500. After tax withheld, he will receive $4500, minus any applicable administration fees that his broker charges.

Note: Once withholding tax is paid, the amount of withdrawal is included in your taxable income for the year. If your marginal tax rate is higher than the withholding tax rate, you’ll end up paying additional tax.

Home Buyers’ Plan Withdrawal 

The Home Buyers’ Plan allows Canadian residents who are buying a home, building a qualifying home for themselves or a related person with disability, to withdraw from their RRSPs without tax being withheld. The program was initially introduced in 1992 and it’s a popular feature of Registered Retirement Savings Plans. 

Qualifying for the Program

To qualify for the program, you have to be a Canadian resident and you or your spouse did not own a principal residence during the period beginning January 1st of the fourth year before the year of withdrawal and ending 31 days before the date you withdraw the funds.

Example: If you withdraw funds on March 31st 2019, the four year period begins on January 1, 2015 and end on Feb 28th 2019.

Amount of Withdrawal

In the 2019 budget, the withdrawal limits under the Home Buyers’ Plan went from $25,000 to $35,000 per account holder. As of date, the withdrawal limit is $35,000. Both spouses are eligible to participate, for a combined total of $70,000

Repayment of Withdrawal

Any amount withdrawn must be paid back within 15 years, starting the second calendar year following the year of withdrawal or 60 days following that year.

Keep in mind that the repayment period could be shorter than 15 years if;

• If the participant dies
• If the participant becomes a non resident
• If the participant reaches 72 years of age or older

Example: Jeff withdrew $35,000 from his Registered Retirement Savings Plan. Over the next 15 years, he has to contribute a minimum of $2333.33 into his RRSP ($35,000 / 15 = $2333.33). If Jeff forgets to contribute into his RRSP for that particular year,  the $2333.33 gets added on top of his income.

Lifelong Learning Plan Withdrawal

Lifelong Learning Plan allows taxpayers to withdraw from their RRSPs for the purpose of financing full time training or education. The LLP is a different from RESPs and cannot be used to finance your children’s education.

Qualifying for the Program

To qualify for the program, you must be an Registered Retirement Savings Plan account holder and be a Canadian resident. In addition, you’d have to be enrolled or have received an offer of enrollment.

• The individual must be in a qualifying educational program.
• The institution must be a designated educational institution.
• The taxpayer must be a full time student.

Please note that an individual can also be enrolled part time and qualify, if they meet the disability conditions.

Qualifying Educational Program

A qualifying educational program is one that lasts for more than three months and requires the student to spend at a minimum 10 hours per week on course work. This could include lectures, training, lab work, research, etc.

Amount of Withdrawal

A LLP participant can withdraw up to $20,000 from their Registered Retirement Savings Plan, limited up to $10,000 in a calendar year. 

The LLP participant also has to enroll before March of the year after the LLP withdrawal. They must still be enrolled in the program in April of the year after the LLP withdrawal unless the course has been completed.

There will not be any tax withheld at the source on the amount of withdrawal. The RRSP issuer will send you a T4RSP slip showing the amount withdrawal. You would have to proceed to file a tax return even if no tax is owed.

Repayment of Withdrawals

The repayment period is 10 years or when the LLP participant leaves the educational program. The payment periods start no later than 60 days following the fifth year after the first LLP withdrawal.

The repayment period could start sooner if the LLP participant fails to qualify for a full time education for at least 3 consecutive months within 2 years of the 5 year period. Repayment will start within 60 days following the second year.

Any amount that is not repaid is added added on top of income.

Keep in mind that the repayment period could be shorter than 10 years if;

• If the participant dies
• If the participant becomes a non resident
• If the participant reaches 72 years of age or older

Non Resident’s Withdrawals

When a Canadian resident living abroad decides to withdraw from their Registered Retirement Savings Plan, the Canadian government would charge a withholding tax rate of 25%. However, this withdrawal rate could be reduced by a tax treaty that Canada may have with that particular country that the citizen is residing in. This reduction in rate is commonly 15%. It’s important to research if the country you’re residing in has a tax treaty with the Government of Canada.

Taxes at Death

At death, the value of the Registered Retirement Savings Plan is included in the income of the deceased. The executor or the estate would have to file a tax return for the deceased of the individual during year of death.

Keep in mind that income tax may be deferred if the named beneficiary on the Registered Retirement Savings Plan is:

1. Spouse or Common Law Partner
2. Dependent Child Under 18 
3. Dependent Child who is mentally or physically disabled of any age

Tax can be deferred if the value of the RRSP is transferred to the Registered Retirement Savings Plan of the named beneficiary or the amount is transferred into an annuity before December 31st of the year following year of death.