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A Registered Retirement Savings Plan (RRSP ) is a type of Canadian account for holding savings and investment assets. RRSPs have various tax advantages [ 1 ] compared to investing outside of tax-preferred accounts. They were introduced in 1957 to promote savings for retirement by employees and self-employed people.

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Taxation [ edit ]

Contributions to RRSPs are deductible from taxable income, reducing income tax payable for the year in which the contributions are claimed. [ 4 ] No income earned in the account is taxed (including interest, dividends, capital gains, foreign exchange gains, mortality credits, etc.). [ 5 ] Most withdrawals are taxed as income when they are withdrawn. [ 6 ] This is the same tax treatment provided to Registered Pension Plans established by employers. [ 7 ] [ 8 ]

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contributions are considered to have been made with savings from before-tax income and tax is paid when amounts are withdrawn: Individual Retirement Accounts in the United States, and Self-invested personal pensions in the United Kingdom.

Disputed net benefits [ edit ]

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: [ 9 ] [ 10 ] [ 11 ] [ 12 ]

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

• 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.
• The inclusion of RRSP withdrawals in taxable income may reduce benefits otherwise received from other programs.

Others dispute that understanding. [ 17 ] [ 18 ] [ 19 ] [ 20 ] [ 21 ] A Canadian economist [ 22 ] and two American tax papers on the American equivalent account support this view. [ 23 ] [ 24 ] 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.

Types [ edit ]

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 difference with a group plan is that the contributor realizes the tax savings immediately, instead of having to wait until the end of the tax year.

• 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. [ 25 ]

Contributing [ edit ]

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 it 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).

Contribution limits are calculated at 18% of earned income (from employment or self-employment), up to a maximum. The maximum has been rising [ 26 ] as shown in the table below. Since 2010 it is indexed to the annual increase in the average wage.