Registered retirement savings plan

Contributions to RRSPs are deductible from total income, reducing income tax payable for the year in which the contributions are claimed.[3] No income earned in the account is taxed (including interest, dividends, capital gains, foreign exchange gains, mortality credits, etc.). Most withdrawals are taxed as income when they are withdrawn.[4] This is the same tax treatment provided to Registered Pension Plans established by employers.[5][6]

Other countries provide similar treatment of tax-deferred accounts established by individual investors, i.e., contributions are considered to have been made with savings from before-tax income and tax is paid when amounts are withdrawn: individual retirement accounts in the United States, and self-invested personal pensions in the United Kingdom.

Net benefits are measured by the difference in outcomes between saving in a taxable account versus saving in an RRSP account. All official sites provide a list of benefits similar to the following:[7]

• Contributions are tax deductible.
• Savings grow tax-free, but are fully taxed on withdrawal.
• Taxes are deferred until withdrawal.

Also commonly claimed:[8][9][10][11]

• The contributor's marginal tax rate when withdrawing funds may be lower than the tax rate the contributor paid when making the original contribution.
• There are possibilities for income splitting.
• A contributor who would otherwise owe more than $3,000 in taxes at the end of the year ($1,800 in Quebec) can relieve themselves of the obligation to pay their taxes in instalments by reducing the net tax owing below the relevant threshold. By not having to pay instalments, such contributors effectively receive the tax benefit as soon as March 15 (the date the first quarterly instalment is typically due) as opposed to at the end of the tax year.
• The inclusion of RRSP withdrawals in taxable income may reduce benefits otherwise received from other programs.

Others dispute that understanding.[12][13][14][15][16] A Canadian economist[17] and two American tax papers on the American equivalent account support this view.[18][19] They provide a model and the math proofs that the tax deduction on contribution is not a benefit, there is no benefit from tax deferrals and that profits are not taxed on withdrawal.

Instead they see the RRSP's benefits as:

• A benefit from tax-free growth that is not taxed on withdrawal.
• A bonus (or penalty) from a decrease (or increase) in the tax rates between contribution and withdrawal.
• A possible loss of other government benefits when withdrawals increase taxable income, and a possible increase in benefits when contributions reduce taxable income.
• A loss when there is a delay between contribution and claiming the tax deduction.

RRSP accounts can be set up with either one or two associated individuals:

• Individual RRSP: an individual RRSP is associated with only a single person, called an account holder. With Individual RRSPs, the account holder is also called a contributor, as only they contribute money to their RRSP.
• Spousal RRSP: a spousal RRSP allows a higher earner, called a spousal contributor, to contribute to an RRSP in their spouse's name. In this case, it is the spouse who is the account holder. The spouse can withdraw the funds, subject to tax, after a holding period. A spousal RRSP is a means of splitting income in retirement: By dividing investment properties between both spouses each spouse will receive half the income, and thus the marginal tax rate will be lower than if one spouse earned all of the income.
• Group RRSP: in a group RRSP, an employer arranges for employees to make contributions, as they wish, through a schedule of regular payroll deductions. The employee can decide the size of contribution per year and the employer will deduct an amount accordingly and submit it to the investment manager selected to administer the group account. The contribution is then deposited into the employee’s individual account and invested as specified. The primary benefit with a group plan is that the employee-contributor realizes the tax savings immediately, because the income taxes his or her employer must deduct on every paycheque can be reduced. By contrast, if a taxpayer making a private contribution is not expecting to owe more than $3,000 ($1,800 in Quebec) at the end of the year, then he or she will have to wait until the end of the tax year (or even not until after that in the case of taxpayers expecting a refund) before realizing the benefit.
• Pooled RRSP: legislation was introduced during the 41st Canadian parliament in 2011 to create pooled retirement pension plans (PRPP). PRPPs would be aimed at employees and employers in small businesses, and at self-employed people.[20]

Contributing and deducting are two different things. Contributions are usually deducted from taxable income in the same tax year but may be held for future use. Because Canada has a progressive tax system, taxes are reduced at the individual's highest marginal rate. For individuals who always claim the same deduction amount as their yearly contribution, their maximum contribution is the 'deduction limit' calculated by the CRA.

The 'deduction limit' is a running total calculated for the next year and printed on every notice of assessment or reassessment, provided the taxpayer is aged 71 years or younger. It is reduced by tax deductions claimed and increased by the year's contribution limit, minus any pension adjustment (PA) and past service pension adjustment (PSPA), plus pension adjustment reversals (PAR).

Since 1991, contribution limits are calculated at 18% of the prior year's reported earned income (from employment or self-employment), up to a maximum. The maximum has been rising[21] as shown in the table below. Since 2010 it is indexed to the annual increase in the average wage.

While it is possible to contribute more than the contributor's deduction limit, it is generally not advised as any amount $2,000 over the deduction limit is subject to a significant penalty tax removing all benefits (1% per month on the overage amount).[22]

RRSP contributions within the first 60 days of the tax year (which may or may not be the calendar year) must be reported on the previous year's return, according to the Income Tax Act. Such contributions may also be used as deduction for the previous tax year.

Prior to 1991, contribution limits were calculated at 20% of the prior year's reported earned income, up to a maximum of $7,500 for taxfilers without an employer-sponsored registered pension plan, or $3,500 for taxfilers who had an employer-sponsored registered pension plan. Furthermore, any unused portion of the contribution limit could not be held for future use, and was therefore lost forever if not contributed before the 60 first days of the year.[23]

An account holder is able to withdraw dollars or assets from an RRSP at any age. Withholding tax is deducted by the institution managing the account. Amounts withdrawn must be included in the taxable income of that year. The tax withheld reduces the taxes owing at year end. There are two exceptions to this process - the Home Buyer's Plan and the Lifelong Learning Plan.

Before the end of the year the account holder turns 71, the RRSP must either be cashed out or transferred to a Registered Retirement Income Fund (RRIF) or an annuity.[24] Until 2007, account holders were required to make this decision at age 69 rather than 71.

Investments held in a RRIF can continue to grow tax-free indefinitely, though an obligatory minimum RRIF withdrawal amount is cashed out and sent to the account holder each year. At that time individuals hope to be taxed at lower tax rates, but may actually end up paying higher rates than were recovered from contributions.

On death the assets remaining in the account are withdrawn and distributed directly to the named beneficiary. They do not flow through the estate. The account is closed. Like other withdrawals, the value of the assets is included in the taxable income of the account's owner. This large lump sum may result in much of its value being taxed at the top tax bracket. The liability to pay the tax lies with the estate, no matter who received the account's assets.

There are exceptions. When a spouse is the named beneficiary, the account continues, without triggering taxes, in the name of the spouse. There are also provisions for the tax-free transfer of assets to minor children, grandchildren and dependents.[25]

Both individual and spousal RRSPs can be held in one of three account structures. One or more of the account types below may not be an option depending on what type of investment instrument (example stocks, mutual funds, bonds) is being held inside the RRSP.

It is possible to have an RRSP roll over to an adult dependent survivor, child or grandchild, as it would to a spouse. This was made possible in 2003 and there are various Income Tax Act (ITA) requirements to allow this to take place. The new registered asset could result in provincial benefits being cut off. In many cases a court application to have someone appointed guardian of the child’s property and person would be necessary to provide a legally authorized party to manage the asset if the child is deemed incompetent to do so. This possibility affects the overall estate plan and often the distribution of the estate.

Acquiring this asset may also affect the adult dependent child's eligibility for provincial assistance programs. A Henson trust may be useful for enabling the adult dependent child to receive RRSP rollovers and still be eligible for provincial social assistance programs such as Ontario disability support program (ODSP). A lifetime benefit trust (LBT) is a new option that may be valuable for leaving a personal trust in a will for a special needs, financially dependent child, grandchild or spouse. It has the added benefit that RRSP assets dedicated to the LBT could be protected from creditors.

Originally, RRSPs were limited to mostly domestic content, that is, Canadian based investments such as GICs, bonds and shares of Canadian corporations, and mutual funds holding such assets. Non-Canadian content was limited to 10% of the plan's assets, originally measured by market value, and in 1971 changed to 10% of book value.

In 1994, the foreign content limit was raised to 20%. However, by then, mutual fund managers found a way to get around this limitation and offer unitholders exposure to foreign markets without using up any of the foreign content quota. They typically did this by holding all fund assets in Canadian treasury bills or similar cash equivalent assets, and using foreign equity index futures or forward contracts with a similar notional value to obtain equivalent market exposure. Since derivatives are generally considered off-balance-sheet items for accounting purposes, these synthetic foreign funds qualified as 100% Canadian content.

In 2001, the foreign content limit was raised yet again, this time to 30%, but the prevalence of synthetic foreign funds was such as to make the limit a matter of form only.

In 2005, the law was changed to remove foreign content limit altogether.[33][34][35][36][37]

• Individual retirement account (IRA) and 401(k) (United States)
• Self-invested personal pension (SIPP) and individual savings account (ISA) (United Kingdom)
• Personal Retirement Savings Account (PRSA) (Ireland)
• Superannuation (Australia)
• KiwiSaver (New Zealand)[38]
• Nippon individual savings account (NISA) (Japan)
• Mandatory Provident Fund (Hong Kong)[39]
• Vanuatu National Provident Fund (Vanuatu) – a compulsory savings scheme for Employees who receive a salary of Vt3, 000 or more a month, to help them financially at retirement.
• Central Provident Fund (Singapore)[40]
• Employees Provident Fund (Malaysia)[41]
• Pensions in Chile

• Registered retirement income fund (RRIF)
• Locked-in retirement account (LIRA) for Locked-in Retirement Savings Plan (LRSP), Life Income Funds (LIF), Locked-In Retirement Income Funds (LRIF), Prescribed Retirement Income Fund (PRIF)
• Registered education savings plan (RESP)
• Registered Home Ownership Savings Plan (RHOSP)
• Henson trust
• Saskatchewan Pension Plan
• Retirement compensation arrangements (Canada) (RCA)
• Tax-free savings account (Canada) (TFSA)
• Taxation in Canada
• Pension

• Canadian Income Tax Act, Tax in Respect of Registered Investments via CanLII
• Canada Revenue Agency