RRSP Primer - Part 2

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RRSP Primer - Part 2

by Gerry Vittoratos | Feb 24, 2016   Comments:

In our last article, we saw the basics of RRSPs. Get your scuba gear ready! We are about to dive into deeper waters of RRSPs.

Is it true I can make contributions to my spouse’s RRSP and claim the tax deduction?

Yes you can! However, the amount you are allowed to put into your spouse’s RRSP is limited to your own RRSP contribution limit. The benefit of spousal RRSPs is to increase the pension funds of your spouse if he/she does not have a big pension fund, or is not, and will not make a lot of income by his/her retirement age. The withdrawal will be taxed in your spouse’s tax return*, who hopefully will be in a lower tax bracket.

*In order for the withdrawal to be taxed fully in your spouse’s tax return, your spouse cannot withdraw the funds for the next 2 years after the contribution year. If this happens, the tax man will re-allocate some of that income into YOUR tax return! Ouch!

Can I claim in advance my RRSP tax deduction?

In a way, Yes. You can file the T1213 form to the CRA and declare in advance the amount of RRSP contributions you will be making during the current year.  The CRA will then allow your employer to reduce your payroll taxes. Of course, timing is key; the form should be submitted at the beginning of the year in order to fully benefit from this advance. And of course, you have to contribute the amount you declare on the form in order to get the benefit!

Can you really pull out of your RRSP tax free to buy a home?

Yes, but with a lot of conditions! The program is called the Home Buyer’s Plan (HBP). You can pull out up to $25,000 from your RRSP to use as a down payment for your home.  You do have to “repay” your RRSP starting the second year after your withdrawal through 15 equal instalments of the amount you withdrew. You repay by re-contributing to your RRSP. If you do not make a repayment, the instalment is added to your taxable income on your tax return.

Other conditions are that you have to be a first-time home owner as per the CRA’s definition, which is that in the four years prior to the year of withdrawal you did not live in a home that you or your spouse owned.

Can I borrow from my RRSP to pursue my studies?

Yes! Again, lots of conditions! This program is called the Lifelong Learning Plan (LLP). You have to be enrolled in a post-secondary educational program on a full-time basis to be able to withdraw money out of your RRSP tax free. You can withdraw up to $10,000 per year, with an overall withdrawal limit of $20,000. You can withdraw money under this program again in later years if your LLP balance is zero.

The repayment is done by contributing to your RRSP. You can delay your first repayment up to five years after the first withdrawal as long as you are a full-time student.  The repayment is done through 10 instalments.

Can I transfer investments from a non-registered account to an RRSP without paying a lot of tax?

Yes you can! Let’s understand the mechanics of such a transfer first before going into the transfer strategy. When you make a transfer of investments such as stocks and mutual funds from a non-registered account to an RRSP account, you have effectively “sold” those investments at the fair market value of the day of the transfer. Therefore, if these investments are in positive territory, you have capital gains to declare and additional tax to pay. If your investments were losing money, the CRA would not allow you to claim capital losses because you did not wait the requisite 30 calendar days to re-purchase the same investments; in this case, you would fall into what the CRA calls “superficial losses”. Talk about bad options!

Instead of doing a transfer of accounts, you can sell the investments on the open market that are losing money, and buy them again in the RRSP account. In that case, there is no gain to declare since you have a capital loss. However, in order to make the capital loss official, you have to wait 30 calendar days after the sale to re-purchase these investments, otherwise, the CRA will not allow you to claim these losses in future years (see superficial losses above).

So in summary: Sell your “loser” investments that you want to keep, wait 30 days, and buy them in your RRSP. Rinse, repeat! You now get the benefit of sheltering your investments, and claim a capital loss that you can use in future years to boot! Remember though that your RRSP contribution limit still applies!

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