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RRSP Tips 2008
RRSP Tip #1
Spousal RRSPs MechanicsSpousal RRSPs can help shift future income from a higher income spouse to a lower income spouse. This can provide some tax savings when the receiving spouse cashes in his or her RRSPs, or converts the RRSPs to a RRIF or annuity. It may also reduce the clawback of the Old Age Security pension for the higher income spouse, and allow the receiving spouse to qualify for the pension income tax credit. Provided no withdrawal is made from spousal plans for at least two calendar years after the year of your last contribution to any spousal plan, the amount withdrawn will be taxed in your spouse’s name. Look into spousal RRSPs – you could reduce your taxes now and in the future. Note that new pension income splitting measures were introduced in 2007 that will provide even greater income splitting opportunities, but that’s a topic for another day. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #2 To be printed before March 2, 2009 Tax Savings from an RRSPIf you have an “RRSP Contribution Limit” as shown on your 2007 Notice of Assessment and you are a B.C. resident, here are three rules of thumb for 2008 RRSP deductions:
Look into the amount you can save with an RRSP contribution today. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #3
Borrowing to Make an RRSP ContributionYes, you can borrow to make an RRSP contribution, but any interest you pay on the borrowed money will not be tax deductible. For this reason, it is generally better to use available cash rather than borrowing. If you have to borrow to make the contribution, try to repay the loan as soon as possible to minimize the amount of non-deductible interest. Before borrowing, seek professional advice to ensure the benefits of making an RRSP contribution outweigh the costs of borrowing. If you hold investments outside of your RRSP, it would be more appropriate to borrow to acquire these investments, as the interest on such borrowing would likely be tax deductible. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #4 Withdrawals from an RRSPProvided the funds are not in a non-redeemable investment or a locked-in RRSP, you may withdraw any portion of your RRSP at any time. In most circumstances, you will pay tax on the amount withdrawn from an RRSP as it is considered income in the year you make the withdrawal. When you make your withdrawal, the financial institution will withhold 10 to 30 per cent for taxes. You’ll get a credit for the tax withheld when you complete your tax return for the year. You may owe additional tax at that time, or be entitled to a refund of part or all of the tax withheld, depending on your marginal tax rate and other tax withheld for the year. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #5 Early Contribution to an RRSPIt’s a great idea to contribute to an RRSP each year, especially if you are young and a long way from retirement. It is advisable to contribute early in the year so that you start the tax-free compounding of earnings within the RRSP earlier. Also consider monthly payments into an RRSP throughout the year. Once made, undeducted contributions within your deduction limit, or to an excess of $2,000, can be carried forward indefinitely, without penalty, for deduction in future years. This could be a substantial advantage if you claim the deductions in years when you are in a higher tax bracket. For your RRSP contribution to be deductible for a particular tax year, the contribution must be made by the 60th day following the end of the year. For the 2008 tax year, the deadline is March 2, 2009. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #6 Implications of Over Contributions to RRSPsAn excess contribution is calculated as the total of all of your undeducted RRSP contributions, minus your current RRSP deduction limit and minus an allowable over-contribution of $2,000. Excess contributions are subject to a 1 per cent per month penalty until they are withdrawn. With prior Canada Revenue Agency approval, you can generally withdraw any excess contributions without taxation within certain time limits. Keep in mind that the penalty situations are complex. Consult a Chartered Accountant for advice if you are in this situation. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #7 RRSPs When You Are 71You must wind up your RRSP by the end of the year in which you turn 71. A straight withdrawal is usually not the best option, since the money will be taxed like any other income, and may push you into a higher tax bracket for the year. You should instead consider transferring the RRSP funds to a Registered Retirement Income Fund (RRIF), or an annuity, which will be paid to you over time. Even though you cannot put money into your own RRSP after the year you turn 71, you can still contribute to a spousal RRSP until the end of the year your spouse turns 71. However, to do so, you will have to have unused RRSP deduction room, or have current earned income. By the end of the year your spouse turns 71, he or she will also have to move the funds from his or her RRSP. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #8 The Home Buyers’ PlanThis plan allows first-time homebuyers (defined in the Income Tax Act as persons who have not owned a home for the prior five years) with RRSPs to borrow up to $20,000 from their RRSPs to purchase their own residence. You must make your withdrawal within 30 days of completing your purchase. You will not be able to deduct any portion of an RRSP contribution that is withdrawn under this Plan within 90 days after it is contributed. You are requested to repay your RRSP, without interest, over 15 years commencing in the second year after the year of the withdrawal. You will be taxed on any scheduled repayments you do not make. For spouses/common law partners planning to jointly purchase their first home, each spouse can borrow up to $20,000 (for a total of $40,000) from their own respective RRSPs. Repayments must likewise be made to their own respective RRSPs. If you or your spouse or common law partner are planning to buy your first home and you have RRSPs, look into the Home Buyers’ Plan. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #9 RRSP Withdrawals for EducationYou may withdraw up to $10,000 per year from your RRSP, without immediate taxation, to finance full-time training or higher education for you or your spouse in a qualifying educational program. A qualifying educational program is one that is not less than twelve consecutive weeks in duration and requires students to spend at least 10 hours on course-related “work” per week, excluding study time. Note that having at least 10 hours of course-related “work” per week does not necessarily constitute full-time status. The status is to be determined by the educational institution. A disabled student can qualify with part-time enrollment. Withdrawals are not allowed from locked-in RRSPs, and cannot exceed $20,000 over a four-year period. A tax deduction is not allowed for an RRSP contribution made less than 90 days before it is withdrawn under this provision. You will be requested to repay the amount withdrawn to your RRSP, without interest, in equal payments over a 10-year period. Payments start with the earlier of the second consecutive year in which you or your spouse are not enrolled in full-time studies and the fifth year after the year in which you first made an Lifelong Learning Plan withdrawal. Any amount not repaid as requested will be added to the income of the planholder for that year. Special rules will apply if the RRSP funds are withdrawn and you, or your spouse, do not complete the educational program. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #10 Who is eligible to contribute to RRSPs?Anyone with “earned income” in a prior year who is subject to Canadian taxation, including non-residents, may contribute to an RRSP. As part of your deduction limit, you can make part or all of your RRSP contributions to a plan in your spouse’s name. You, as the contributor, are still entitled to the tax deduction. For this purpose, a spouse refers to a legal married partner or a common-law partner of the opposite or same sex with whom you have cohabited for the last 12 months. To maximize your long-term tax savings, there should be an attempt to “equalize” the retirement income of both spouses. Therefore, RRSP contributions should always go into the name of the spouse who will otherwise have the lower income in retirement. If you haven’t done this in prior years, don’t worry. New measures that were introduced in 2007 provide some additional income splitting opportunities for eligible pension income. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #11 RRSP LimitsWhen determining how much you can contribute to RRSPs, keep in mind there is at least one more step to the calculation for members of Registered Pension and Deferred Profit Sharing Plans. Ordinarily, your deductible contributions to RRSPs are limited to 18 per cent of your prior year’s earned income, to a maximum of $20,000 for 2008. If you are a member of a Registered Pension Plan or a Deferred Profit Sharing Plan, this amount is reduced by the pension adjustment amount(s) reported on your prior year T4 slips. A pension adjustment reflects the value of the future benefit to which you are entitled as a result of being a plan member for the year. Your 2008 RRSP deduction limit is on your 2007 Notice of Assessment and should already reflect the 2007 pension adjustment on your T4(s). Your unused RRSP deduction limit room as shown on your prior year’s Notice of Assessment will confirm the net accumulated amount you can contribute based on 2007 and prior years. There may be other adjustments to your RRSP deduction limit if there have been significant changes to your Registered Pension Plan coverage during the year. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #12 Earned Income and Your RRSPYour maximum RRSP deduction is based on your earned income in the previous year and unused contribution room from prior years. What is considered earned income? Common forms of earned income include employment income, income from an unincorporated business, and rental income. Losses and expenses from these sources reduce earned income. Your earned income is increased by any taxable alimony or maintenance you receive and reduced by any deductible alimony or maintenance you pay during the year. Earned income does not include investment income (such as capital gains, interest and dividends) or retirement income (such as RRIF income, old age security and Canada Pension Plan) except certain disability pensions. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #13 What is a self-directed RRSP and what are its advantages?A self-directed RRSP allows you to make a wider variety of investments. The most common self-directed RRSP investments are shares and debts of public corporations, B.C. and Canada Savings Bonds, mutual funds, and home mortgages. There is usually an annual administration fee for a self-directed RRSP in the range of $100 to $150. Such fees are not tax deductible. Generally, you should have at least $15,000 of assets in a self-directed RRSP to make it worthwhile to pay the average administration fee. If you’re looking for more control and flexibility over your RRSP investments, look into a self-directed RRSP. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #14 Can you transfer your RRSP from one financial institution to another?Yes you can, but be aware that in order to transfer an RRSP account without triggering any taxes, the transfer must be made payable to the new institution in trust for you. Your new RRSP issuer arranges the transfer. Between self-directed plans, you can transfer existing investments “in kind.” The trustee of your present RRSP may charge a nominal fee against your RRSP for the administrative work involved in the transfer. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #15 Pension Adjustment ReversalsIf you have been a member of a Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP), you have had your annual RRSP deduction limit reduced by a figure called the pension adjustment. This figure is reported on your T4 slip for each year you are a member of an RPP or DPSP. If you exited from an RPP or DPSP in 2008, it may cause a downward change to the pension adjustment figures previously reported to you regarding that plan. The revision is called a Pension Adjustment Reversal (PAR). This will adjust your 2008 RRSP deduction limit upward. A PAR would be reported to you if your pension benefits were not vested, or if the lump sum you were able to transfer from the RPP or DPSP to your own RRSP was less than the pension adjustment figures previously reported to you. The PAR for those who leave an RPP or DPSP should be reported to them within 60 days after the end of the calendar quarter (or January 31 if the termination occurs in the fourth quarter of the calendar year) in which they cease to be a plan member. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #16 Is there a good time to use the money in an RRSP?One of the objectives of tax planning with RRSPs is to contribute funds in years when you are subject to higher tax rates, and withdraw funds in years when you are subject to lower tax rates. One such opportunity could arise in the first year you become self-employed, when your net income is low as a result of start-up costs, or is deferred as a result of tax planning. For example, if you are commencing a business in 2009, you could contribute $10,000 to your RRSP by March 1, 2009, deduct it on your 2008 tax return, and receive a tax refund. You could then withdraw the $10,000, net of withholding taxes, from your RRSP later in the year, include it in your 2009 income, and pay little or no tax as a result of having little or no other income in the year. If you are planning to start a business, consider the short-term saving of a well-timed RRSP contribution. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. -30- For media inquires, contact: RRSP Tip #17 Pension Income SplittingIf you received eligible pension income during 2008, by making the pension income splitting election you can transfer up to ½ of your eligible pension income to your spouse or common-law partner. Eligible pension income includes the taxable portion of annuity payments from a superannuation or pension fund plan, or if you are over 65, the annuity payments from your LIF, or RRSP and any payments from your RRIF. If your spouse would not otherwise receive pension income, by splitting your pension income he or she can utilize the pension income credit of up to $2,000 (for federal tax purposes, $1,000 for B.C. tax purposes), which can save your family up to $350 in taxes. You can potentially get more cash in your pocket by splitting your pension, since splitting will bring your net income down to reduce any Old Age Security clawback. The pension income splitting rules do not make spousal RRSPs obsolete, since spousal plans still have income splitting benefits for the years before you turn 71 if you have not yet converted your RRSP to a RRIF or annuity. If you plan on retiring early, spousal RRSPs are still a great income splitting vehicle. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. - 30 - For media inquires, contact: RRSP Tip #18 RRSP Eligible InvestmentsYou can hold the majority of regularly traded investments in your RRSP. However, there are certain investments that are ineligible to be held in your RRSP. Investments that are eligible include, but are not limited to, securities listed on a designated stock exchange (other than futures contracts), mutual fund units, Small Business Corporation shares (in limited circumstances), mortgages, investment grade debt obligations that are part of a minimum $25 million issuance, and annuity contracts. Ineligible investments include, but are not limited to, commodity futures, most private company shares, listed personal property, and mortgages on property owned by you other than properly insured mortgages administered by a National Housing Act approved lender. Before you make an investment in your RRSP, see your RRSP issuer or a Chartered Accountant for advice. Information for RRSP Tips is provided as a public service by the Chartered Accountants of British Columbia. For more RRSP and tax tips visit www.rrspandtaxtips.com. - 30 - For media inquires, contact: |
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