Registered Retirement Savings Plan (RRSP) Income

Does it pay to have an RRSP?

Yes it does! Read on to learn about RRSP payments and withdrawals.

Registered Retirement Savings Plan (RRSP) Income

An RRSP is a tax-deferral plan set by an individual for themselves or their spouse. When you make an RRSP contribution, you are allowed a deduction based on the contribution limit. Funds accumulate tax-free in the plan until withdrawn. The age limit for contribution to RRSPs is 71. You must make arrangements to convert your RRSP funds to an RRIF or annuity by the end of the year in which you will turn 71; otherwise, the full value of the RRSP will be included in your next year’s income.

RRSP Annuity Payments

Annuity payments from an RRSP are paid out over several years rather than in a lump sum. You may choose to do so to minimize tax.

Other RRSP Payments

RRSP annuity is only one kind of payment made from an RRSP. RRSPs that have not matured, and which have not been converted to an annuity, could also provide income.

Refund of Premiums to a Spouse (Box 18)

If a plan holder dies, special rules come into play to govern the taxation of the assets in the plan. Essentially, if the plan has not matured, the assets may be left to a surviving spouse, and taxed to the surviving spouse, rather than the deceased plan holder or his or her estate.

These assets paid to the spouse are referred to by definition as “refund of premiums”, and the surviving spouse may roll forward all, or any part, of the refund of premiums into their own RRSPs, tax-free.

This amount appears in Box 18 of the T4RSP slip. The corresponding deduction for transfer can be claimed on Line 20800 of the tax return. This income is declared on the surviving spouse’s tax return, not on the deceased's tax return.

If there is no surviving spouse, any payments paid out of an RRSP to a dependent child or grandchild under age 18 are taxable in the hands of the recipient. Such amounts may be eligible for rollover to a special annuity, consisting of equal annual payments, until the child reaches age 18.

Refund of Excess Contributions (Box 20)

Upon death of an RRIF annuitant, the fair market value of the plan is deemed to be received by the deceased prior to death. The amount in Box 18 of the T4RIF slip represents fair market value (FMV) of the plan at death. This amount is reported on Line 13000 of the Income Tax and Benefit Return. However, if there is a surviving spouse, or a dependent child or grandchild under 18 years, part, or all, of the income may be reported on a beneficiary’s return.

Deemed Receipt on Deregistration

Refund of Excess Contributions are withdrawals of excess contributions that the taxpayer could not, or chose not, to deduct on Line 20800 in any taxation year. This amount appears in Box 20 of the T4RSP slip.

You are entitled to a corresponding deduction on Line 23200 of the return. As this deduction is omitted, the Canada Revenue Agency must certify that the amount allowable for withdrawal is tax-free.

Withdrawal and Commutation Payments (Box 22)

These are all regular withdrawals made by individuals from an RRSP. The total amount of withdrawals made appears in Box 22 of the T4RSP slip. The financial institutions are required to withhold tax before releasing the funds at the rate specified below:

Withdrawal made up to $5,000 – 10%

Withdrawal made between $5,001 and $15,000 – 20%

Withdrawal made over $15,001 – 30%

This income is reported on Line 12900 of the income tax return. You are entitled to a deduction for tax withholdings. Usually, the tax withheld from the T4RSP slip is not adequate and you may have to pay additional taxes in the year of withdrawal. These extra taxes are paid when you file your taxes.

Example: Lucy Loretta withdrew funds from her RRSP. The financial Institution deducted taxes from her RRSP. Lucy wants to know if she still needs to declare her RRSP withdrawals on her tax return, even though taxes were deducted, when she cashed her RRSPs.

Answer: Lucy must report her RRSP withdrawals. Regardless of what taxes are paid at the time of withdrawal, she may pay additional taxes on this withdrawal based on her marginal tax rate. When she originally contributed to the RRSP, she would have claimed that amount as a deduction on her tax return.Therefore, Lucy must include all withdrawals from her RRSPs as income on her tax return; she will get a credit for tax withheld.

Withdrawal of Spousal RRSP Plans (Box 24)

“Spousal RRSP” means the plan from which funds are withdrawn is a spousal plan. Financial institutions specify this by putting “Yes” in Box 24. The name and Social Insurance Number of the spouse appear in Boxes 38 and 36.

If the funds are withdrawn from a spousal RRSP before the three-year period limit, the withdrawn funds are taxable in the hands of the contributor. If the funds are withdrawn after the three-year period limit, from the last contribution to the spousal plan, then the funds are taxable in the annuitant's (spouse’s) hands.

As the saying goes, we reap what we sow…So reap those RRSP rewards!