Tax Bulletin

There can be several types of fees associated with RRSPs. These fees are usually higher for trusteed plans.

Fees are usually charged if you make withdrawals from your plan or your plan is wound up or transferred to another RRSP issuer.

In addition to these fees, there are annual administration fees associated with trusteed RRSPs. These fees are not deductible for tax purposes. If they are paid with RRSP funds, this will simply reduce the amount available for future withdrawal.

You should always be clear as to what fees will apply to your RRSP before you invest in order that you will know the annual costs and the cost of winding up your plan.

Your RRSP can hold any type of investment. However, you should restrict your RRSP holdings to qualified investments only, in order to avoid the adverse tax consequences of holding non-qualified or prohibited investments (see B4 for details on prohibited investments). Fortunately, a wide range of investments qualify for your RRSP which include:

• cash and bank, trust company, or credit union deposits, including GICs;
•  shares listed on the TSX Venture Exchange, the Toronto Stock Exchange, the Aequitas NEO Exchange, Montreal Exchange, and the Canadian Securities Exchange;
• shares listed on most foreign stock exchanges;
• units of mutual fund trusts;
• shares of Canadian public corporations which are not listed on the stock exchanges above;
• options on the purchase of eligible investments;
• most government debt and debt of corporations listed on the Canadian stock exchanges described above;
• investment-grade gold and silver bullion coins, bars, and certificates on such investments (where certain conditions are met); and
• certain other qualifying debt obligations.

In 2011, changes were made to the rules governing the consequences of acquiring non-qualifying investments in your RRSP. For such assets acquired after March 22, 2011, a tax equal to 50% of the fair market value of the investment, at the time it was acquired or became a non-qualifying investment, will apply to the RRSP annuitant. This 50% tax also applies to investments held in an RRSP on March 22, 2011 that become non-qualifying after that date. Note that income earned on non-qualifying investments will continue to be taxable. Where the non-qualifying investment is disposed of, and certain conditions are met, the tax will be refunded. If the purchase and sale are in the same year, and the refund is allowed, the tax and the refund will be offset. As a result, it will be beneficial to dispose of these non-qualifying assets before the end of the year in which they were acquired. Contact your BDO advisor for more information on these rules.

Significant changes in the 2011 federal budget introduced the concept of a prohibited investment for RRSP purposes, making the RRSP rules more consistent with the rules for TFSAs. A particular investment is generally considered a prohibited investment if you and non-arm’s length parties together hold an interest of 10% or more in the investment. These rules are of particular importance for investments in privately held companies within RRSPs. Another common investment that may be caught is an investment in a mortgage investment corporation since a higher ownership threshold previously applied. Prohibited investments are subject to a 50% penalty tax.

Income earned and gains realized on these investments after March 22, 2011 is generally subject to a 100% advantage tax.

If you hold any shares of private companies in your RRSP or any other investment that may be a prohibited investment, please contact your BDO advisor to discuss how these rules may affect your RRSP.

Normally, you will want to choose RRSP investments that maximize your return and stay within your risk tolerance. While equities hold out the promise of higher returns, they are more volatile than bonds or GICs. Most people prefer to hold a larger percentage of equities in their RRSP when they are younger and are willing to take more risks and then gradually convert to more stable, income-producing investments as they near retirement.

Tax can, however, play a part in your investment decisions if you have investments inside and outside of your RRSP. Remember that income earned and capital gains realized in your RRSP are not taxed until they are withdrawn from your plan, usually after you retire. Therefore, from a tax point of view, there is a bias to hold income- producing investments such as GICs inside your RRSP as the interest income will be fully taxed if they are held outside of your RRSP. Similarly, it makes sense to hold investments that produce capital gains outside of your RRSP, as tax only has to be paid on 50% of the gain. Also, there will be a bias towards holding stocks and other investments that produce eligible dividends outside of your RRSP due to the lower tax rate that applies on these dividends.

You can break down your investment decisions from a tax perspective even further. Capital gains are only taxed when they are realized (that is, when you sell your investment). If you invest in stocks that you expect to sell in the short-term outside of your RRSP, capital gains will be realized that will be taxable, reducing the funds you have to invest. However, if you invest in stocks that you expect to hold for several years, any capital gains that accrue will not be subject to tax until you sell. Therefore, from a tax perspective, it makes sense to hold stocks that are short-term holds in your RRSP, where the tax on capital gains will be deferred, and to hold stocks that are long-term holds outside of your RRSP.

Keep in mind that tax advantages can sometimes conflict with other objectives for your RRSP investments. Although it may make sense to invest in stocks that are short-term holds in your RRSP, these investments usually are riskier and may conflict with your objective to have stable investments in your RRSP. In addition, if you incur losses on investments held in your RRSP, the losses will not be tax deductible — they will reduce the size of your RRSP that will be available to you in your retirement.

Your primary concern in choosing investments for your RRSP should be to maximize your return while staying within your risk tolerance. However, tax can play a part in making these investment decisions. Contact your BDO advisor if you have any questions about the type of investments that you should be holding in your RRSP.

Foreign property generally includes foreign currency, shares and debt obligations of companies listed on most foreign stock exchanges, including mutual funds that invest in these assets, and debt obligations of certain foreign governments. These assets are qualifying RRSP investments.

Your RRSP cannot have a direct investment in real estate. However, it is possible to invest indirectly in real estate by buying shares of publicly traded companies which invest in real property or units in a publicly traded Real Estate Investment Trust (REIT).

It is possible to invest RRSP funds in a mortgage on your own home. While this offers a feeling of comfort knowing that you, in effect, owe the funds to yourself (and it may be easier to obtain funds from your RRSP than from a commercial lender), there may not be any significant advantage gained by doing this. The mortgage must provide for commercial interest and repayment terms. Consequently, your monthly payments would not change. There will be a benefit if the rate of return on the mortgage exceeds the return you would have otherwise received on your RRSP funds. However, you will also have to take into account that a mortgage of this sort is generally more expensive to arrange.

The mortgage must also be administered by an approved lender under the National Housing Act, as well as insured under that Act or by a corporation that is approved as a private insurer and offers such services to the public.

Note also that there is no requirement for the mortgage to be a first mortgage or residential mortgage in order to be a qualified investment. However, if you or someone with whom you do not deal at arm’s length is the mortgagor, all of the above noted requirements must be met.

Keep in mind that if you are a first-time home buyer, it is possible to withdraw up to $35,000 from your RRSP under the Home Buyers’ Plan (HBP) when you buy a qualifying home provided the withdrawal is made after March 19, 2019. Your spouse can also withdraw an amount up to the limit from their RRSP. We discuss the HBP in more detail under "Making withdrawals from your RRSP".

LSVCCs are investment funds that are mandated to invest in small and medium-sized privately held businesses with the potential for high returns. However, the investment risks can be high.

The federal government offers a 15% tax credit on a maximum of $5,000 invested in shares in a provincially registered LSVCC, yielding a maximum credit of $750. If the first registered holder of the share is an RRSP for a spouse or common-law partner, the RRSP contributor or the annuitant (recipient) can claim this credit for that share.

Federal tax credits for federally registered LSVCC were phased out and ended in 2017. Note that certain provinces offer matching or similar credits.

Contact your BDO advisor before investing in an LSVCC if you have any questions as to the potential risks and rewards.

Investment management fees relate to the services provided by an investment manager on behalf of the owner of the investments. In the case of registered plans, such as RRSPs, investment management fees represent an expense of the registered plan trust, and generally, it would be expected that such fees would be paid by the trustee using funds from within the plan. However, it is not uncommon for the plan annuitant (i.e. the “controlling individual”) to redirect their investment management fees to an open account, which results in the fees being paid with funds outside of their registered plan. The CRA had a long-standing administrative policy that allowed the payment of these expenses from outside of the registered plan by the controlling individual without adverse tax consequences.

However, in late 2016, the CRA indicated that they would apply a new position where the controlling individual could be subject to tax at a rate of 100% of the amount of the fees on their registered plans that were paid outside the plan. This new position was to be effective beginning on January 1, 2018. However, due to stakeholder concerns, the Department of Finance performed a tax policy review. As a result, in 2019, the Department of Finance released a comfort letter indicating that the advantage tax rules should not apply to a reasonable amount of investment management fees paid by a plan annuitant directly rather than within the plan. It is anticipated that the recommendations of this comfort letter will result in a change in the legislation to allow such reasonable fees paid outside of a registered plan effective for 2018 and subsequent tax years.

Remember also that investment management fees for registered plans are not deductible whether paid outside or inside of a registered plan.

This depends on your personal situation. In order to take full advantage of the tax deferrals offered by an RRSP, you should wait until the end of the year in which you turn 71 (see C3) and then either purchase an annuity or transfer your RRSP assets to a Registered Retirement Income Fund (RRIF), depending on which best suits your needs (see C4).

However, you may require retirement income from your RRSP prior to age 71. When you do need money, you can withdraw the funds you need (remembering that withdrawals are fully taxable). You could also purchase an annuity or transfer your RRSP assets to a RRIF at any time prior to the end of the year in which you turn 71.

Also, it may make sense to purchase an annuity with some of your RRSP funds or transfer funds to a RRIF when you turn 65, if you don't have other income that will qualify for the federal pension income tax credit on income of $2,000 each year. Income from an annuity or RRIF at age 65 or over is considered pension income for purposes of this credit. There are also provincial/territorial pension credits the amounts of which vary depending on your province/territory of residence.

In addition, income eligible for the pension credit is eligible for the pension income splitting rules. Under the pension income splitting rules, a recipient of eligible pension income can transfer up to one-half of their eligible pension income to his or her spouse’s tax return and have that eligible pension income taxed as the spouse’s income. Where the pension recipient is in a higher tax bracket than the transferee, this splitting of the pension income can result in a tax saving. Also, a benefit can arise if the transferee spouse can claim the pension credit on the income transferred. However, it is also important to consider the impact of the pension income transferred on tax credit amounts that are based on individual net income. The transfer of eligible pension income to a spouse’s tax return requires that both the transferor and transferee sign an election form to allow the transfer of income for tax purposes.

You cannot have an RRSP past December 31 of the calendar year in which you turn 71. Prior to that date, you must collapse your RRSP and pay tax on the fair market value of the plan's assets at that time, purchase an annuity, or transfer your RRSP assets to a RRIF. If you purchase an annuity or transfer the assets to a RRIF, no tax is paid on the conversion.

As mentioned in question C3, there are basically three ways you can take money out of your RRSP. First, you can collapse all or part of your RRSP. Any amounts withdrawn will be fully taxable to you in the year of withdrawal. Your RRSP issuer will withhold tax on your withdrawal (the withholding tax rate varies with the size of the withdrawal).

You can also purchase an annuity or a RRIF with your RRSP. Generally, you would do this when you want to receive retirement income from your RRSP. Withdrawals from an annuity or a RRIF will be taxable only when received by you.

Annuities:

An annuity is a right to receive periodic payments of income, either for life or for a fixed number of years. Several types of annuity products are available, such as annuities which will continue to pay income until the later of your death or the death of your spouse. The size of your periodic payment will depend on the length of the annuity term — the longer the term of your annuity, the smaller the payment.

You can use your RRSP to buy an annuity, usually from a life insurance company, to give you a stream of income in your retirement. This income will be fully taxable to you when you receive it as pension income.

The advantage of an annuity is that it gives you a guaranteed stream of income for the annuity term. In exchange for this income stream, you will, in effect, give up the control of your investments to the issuer of the annuity. Also, your purchasing power will be at risk for inflation unless the annuity has inflation adjustments.

RRIFs:

A RRIF is like an RRSP with two main exceptions. The first difference is that, except for certain transfers, contributions cannot be made to a RRIF. Secondly, a minimum amount must be withdrawn from the plan each year. Your RRIF can hold the same investments as your RRSP. As well, you can have a self-directed RRIF in the same manner as your self-directed RRSP.

A minimum percentage must be withdrawn each year, depending on your age. The percentage is applied to the fair market value of plan assets as of January 1 of each year to determine the dollar amount of the mandatory withdrawal for that year. More than the minimum can be withdrawn, if so desired.

Another option for calculating minimum RRIF withdrawals is to use your spouse's age in place of your own, even if their age is less than 71. This option is for purposes of determining the minimum withdrawal amount only and does not apply for other purposes such as determining when your RRSP matures. This alternative does allow you to defer the taxation of plan assets to the extent that your spouse is younger than you.

The main advantage of a RRIF over an annuity is that you maintain control over your investments. With that, however, comes the risk that your investments will not perform to your expectations.

As mentioned in question B8, the HBP is a program that allows you to withdraw up to $35,000 from your RRSPs to buy or build a qualifying home. In order to be eligible for this plan, you must meet certain conditions:

• You must be considered a first-time homebuyer. This means that, in the four-year period prior to purchasing a qualifying home, you didn’t occupy a home that you owned or that your current spouse or common-law partner owned
• You must have a written agreement to buy or build a qualifying home
• You must be resident in Canada at the time you withdraw the funds from your RRSP and up to the time you purchase or build a qualifying home, and
• You must intend to occupy the qualifying home as your principal place of residence within one year after buying or building it.

The HBP also allows you to withdraw funds if you are buying a qualifying home for a related person with a disability for the purposes of them occupying it as their primary residence. Specific conditions will apply in this situation.

Starting in 2020, individuals can re-qualify for the HBP after the breakdown of a marriage or common- law partnership if certain conditions are met.

Generally, amounts withdrawn must be repaid to your RRSP in 15 equal instalments, starting with the second taxation year following the year of withdrawal. As long as the required payments are made, there will not be an income inclusion for the withdrawal.

If you are 55 years of age or older at the time you withdraw funds from your RRSP, additional planning may be necessary to avoid inclusions in income of the remaining balance of your HBP in the years following the year in which you turn 71 when your RRSP matures (see C3).

As a registered user of “My Account”, you can view the total withdrawals, previous annual repayments, cancellations and income inclusions as well as the repayable balance remaining and the required repayment for the current year. Contact your BDO advisor for more information on the HBP.

In its 2022 budget, the federal government introduced a new registered account, the Tax-Free First Home Savings Account (FHSA). Draft legislation was released on November 3, 2022 but has not yet been enacted. If passed, first-time homeowners will be able to contribute up to $8,000 per year to this account, to a maximum of $40,000 over their lifetime, starting in 2023.

Similar to an RRSP, direct contributions into an FHSA will be tax-deductible and funds contributed to the plan will be able to earn investment returns tax-free. Funds can be withdrawn tax-free from the FHSA to purchase a qualifying home.

It appears that you can withdraw funds from both an FHSA and an RRSP (under the HBP) to purchase the same qualifying home. A restriction in previous versions of the draft legislation prevented using funds from both the HBP and an FHSA. However, that restriction was not included in the current version of the draft legislation.

Whether you should contribute first to your RRSP, with the aim to withdraw funds using the HBP, or open an FHSA will depend on many different factors, including the amount of funds you have available to contribute and the amount of time you have to save in advance of making a qualifying home purchase. While both the FHSA and the HBP allow you to withdraw funds tax-free on the purchase of a qualifying home, a withdrawal under the HBP is a loan that will be required to be repaid. Thus, it would appear that contributing first to an FHSA may be a better option. That said, where you have excess funds after contributing to an FHSA, or once you have reached the $40,000 lifetime maximum, it may make sense to also make contributions to your RRSP so as to be able to use the HBP.

Depending on the facts of your particular situation, you may also consider transferring funds from your RRSP to an FHSA since, unlike the HBP, funds from an FHSA can be withdrawn tax-free with no need for repayment. However, while funds can be withdrawn from an RRSP under the HBP all at once, funds can only be transferred from an RRSP to an FHSA at a maximum rate of $8,000 per year. Note that amounts transferred from an RRSP to an FHSA will form part of the $8,000 annual limit so attention must be paid to ensure that the total amount contributed, including amounts transferred from an RRSP, do not exceed this amount. Where funds are transferred from an RRSP to an FHSA, the contribution room to the RRSP will not be restored.

It will be important to review all of your options when planning to save for your first home. Your BDO advisor can help you decide how best to maximize your savings.

For more details about the proposed FHSA, along with other proposed income tax changes related to housing, read How Tax-related Housing Proposals from the 2022 Federal Budget Impact You.

The Lifelong Learning Plan (LLP) allows you to "borrow" up to $10,000 per year, to a maximum of $20,000 over a period of up to four calendar years, from your RRSP to help you finance full-time training or education for you or your spouse/common-law partner.

The amount withdrawn will not be taxed as a normal RRSP withdrawal. It will be treated like an interest-free loan, generally repayable to your RRSP in equal instalments over a 10-year period. Your first payment is due in the second consecutive year, after the year of withdrawal, in which the eligible student would not be a qualifying student for a period of at least three months, or in the fifth year following the first year of withdrawal, whichever is earlier. If you don't make the required payment in a year, the unpaid amount will be included in your income for that year. As is the case for RRSP contributions, a payment made in the first 60 days following a given year will qualify as a repayment for that year.

In order to qualify, the LLP student (you or your spouse/common-law partner) must be enrolled in full-time training or higher education for at least three consecutive months at a designated educational institution, before March of the year after the LLP withdrawal. If the LLP student is disabled, he or she can enroll on a part-time basis.

If you have recently contributed to your RRSP, there is another rule to keep in mind. RRSP contributions may not be deductible if they are made less than 90 days before an LLP withdrawal is made.

As a registered user of “My Account”, you can view the total withdrawals, previous annual repayments, cancellations and income inclusions as well as the repayable balance remaining and the required repayment for the current year.

Generally, if there is a breakdown in a marriage or common-law relationship, property held in an RRSP can be transferred on a tax-free basis between the RRSP accounts of the spouses or common-law partners. Note that any transfers must be made directly between the accounts and must be pursuant to a court order or a written separation agreement.

If you leave Canada and become a non-resident, you will be allowed to keep your RRSP account and you will not be taxed in Canada on any income or gains as they are earned or realized in your RRSP. However, you will be subject to Canadian withholding tax on payments made to you out of your RRSP while you are a non-resident. Generally, tax is withheld at a rate of 25%, unless there is a treaty between Canada and your new country of residence that reduces or eliminates the withholding tax. You will also need to consider the tax consequences of continuing to hold your RRSP when in your new country of residence. Tax rules in other countries may require income and gains earned in the RRSP to be taxed in the year earned rather than when funds are withdrawn from the plan, or additional forms and elections may need to be filed to allow your RRSP to be treated in a similar manner as it is treated for tax purposes in Canada.

Your BDO advisor can provide more detailed information to you in the event of a marriage breakdown or if you plan to emigrate from Canada.

On your death, you are deemed to have collapsed any RRSPs that you have. Therefore, you will be taxable on the fair market value of the plan at that time.

If after your death and before your property has been distributed to your beneficiaries, the fair market value of your RRSP investments decreased, there is a provision to allow the recognition of that loss. The loss can be deducted against the RRSP income inclusion on your final return upon the final distribution of property to your beneficiaries from your RRSP. The amount that can be carried back will generally be the difference between the amount of the RRSP income inclusion as a result of death and the total of all amounts paid out of the RRSP after your death. The final distribution will generally need to be made before the end of the year that follows the year in which you died in order to be able to carryback a loss.

In certain cases, the value of your RRSP will not be included in your income. If your spouse is the beneficiary of your RRSP, the value of your RRSP can be included in their income instead of being included on your final tax return. They can then transfer this amount to their own RRSP, meaning that they will not have to pay any tax on these funds until they withdraw the funds from their plan.

Where a financially dependent child or grandchild (referred to here as a child) is the beneficiary of the RRSP, the income from the collapse of the RRSP will be taxable to them. Financial dependence is a question of fact. However, if the child’s income for the year before your death is under the basic federal credit amount for that year (for 2022 deaths, the applicable amount is $13,808), the child will be deemed to be financially dependent. Note that for an infirm child, the deemed dependence income threshold is higher at $22,470 for 2022 deaths. Finally, where the child is either infirm or under 18, it may be possible for the child to defer some or all of this income inclusion.

For dependent infirm children, the amount received can be transferred to an RRSP set up for the child, meaning the funds will not be taxed until the funds are withdrawn. Alternatively, the funds can be transferred to an annuity for the benefit of the child and will be taxable when received.

The RRSP rollover rules also allow a rollover of a deceased individual's RRSP proceeds to the Registered Disability Savings Plan (RDSP) of the deceased individual's financially dependent infirm child or grandchild. These rules will apply for amounts transferred to an RDSP from RRIF proceeds and certain lump-sum amounts paid from RPPs as well.

If the dependent child or grandchild is not physically or mentally infirm and is under 18, the RRSP can be rolled into an annuity for the benefit of the child as long as it is a fixed-term annuity that does not extend beyond the year in which the child turns 18. The annuity payments will be taxable to the child in the years they are received.

The rules for RRIFs are similar to the rules for RRSPs. If you die and the plan assets are not payable to your spouse or to a dependent child or grandchild, the fair market value of the plan is included in your income. As well, the relieving measure discussed in C9 for value decreases in RRSP investments between death and the distribution of property to beneficiaries will also apply to allow for the carryback and deduction of post-death value decreases in RRIF investments.

If your spouse is entitled to the plan assets, he or she can simply become the annuitant of the RRIF or the RRIF assets can be transferred to a RRIF for the spouse. This gives your spouse the ability to base the remaining payments on his or her own age or on your age.

If the RRIF balance is payable to a child or grandchild who was financially dependent on you for support at the time of your death, the RRIF balance is taxable to the recipient in the same manner as an RRSP, as described in C9.

The treatment of an annuity on your death depends on the type of annuity you have purchased. If a life annuity was purchased with no survivor benefit, your estate will have no entitlement to any amount after your death and therefore, no amount will be taxable.

If the annuity calls for a continuation of the benefits to your spouse, the amounts will be treated as taxable income to him or her, as received. If the annuity contains a provision where a lump-sum is payable to someone other than your spouse if you die prior to the end of the term, the lump-sum is treated in the same way as the balance of an RRSP on death (see C9).