Tax Lesson 7 YOURLOGO Start Lecture Note: This screen has no script. Static page. YOURLOGO Start Lecture

Registered Retirement Savings Plan (RRSP) Contributions to RRSPs are allowed as a deduction from a taxpayer’s net income. RRSPs can grow tax-free. Any withdrawals from RRSPs (other than the Home Buyers Plan and the Lifelong Learning Plan) are taxable (and hence are usually a bad idea) Taxpayers who are first-time homebuyers can withdraw up to $25,000 from their RRSP to purchase a home. Withdrawn funds must be repaid (a minimum of 1/15 of the amount withdrawn must be repaid each year) Taxpayers may withdraw up to $10,000 per year, up to a maximum of $20,000, to pay for expenses related to attending post-secondary school full-time. Withdrawn funds must be repaid (a minimum of 1/10 of the amount withdrawn must be repaid each year) When any Home Buyers Plan or Lifelong Learning Plan funds are repaid to a taxpayer’s RRSP there is no deduction from income Taxpayers must withdraw all funds from their RRSP by December 31st of the year they turn 71. Instead of taking the RRSP funds (and including the amount in income) taxpayers can (and should) convert their RRSP to a Registered Retirement Income Fund (RRIF) or an annuity (not discussed in these notes)

Registered Retirement Savings Plan (RRSP) (cont) A RRIF can also grow tax-free but no additional funds can be contributed to it and each year the taxpayer must withdraw a portion of the funds (and include the amount withdrawn in their income). The amount that must be withdrawn from a RRIF increases as the taxpayer’s age increases Contributions to an RRSP are limited to an annual maximum equal to the lesser of: 18% of the prior year’s earned income. Earned income includes: employment income, business income, spousal support payments received and rental income from renting real property (any employment losses, business losses, spousal support payments made and rental losses from renting real property is subtracted); and $25,370 in 2016 (in 2017 the limit is $26,010) Any unused RRSP contribution room carries forward. Contributions above the RRSP contribution room are subject to a 1% penalty tax per month Note: if a taxpayer borrows money to earn tax-free income such as borrowing money to buy investments in an RRSP (or RRIF, RESP, RDSP, or tax-free savings account) then the interest expense is not deductible for tax purposes

Registered Retirement Savings Plan (RRSP) (cont) If the taxpayer has a work pension plan, i.e., a Registered Pension Plan (RPP), then a pension adjustment (which appears on an employee’s T4 slip) will reduce the amount they can contribute to an RRSP A retiring allowance is a payment to an employee (excluding a pension) who has retired or been laid off. The amount received is taxable, but a certain “additional” amount can be contributed to the employee’s RRSP. This “additional” amount is in addition to their regular RRSP contribution room and is: $2,000 x number of years employed with the employer prior to 1996; plus $1,500 x number of years employed with the employer prior to 1989

Registered Education Savings Plan (RESP) Allow taxpayers to save money for their children or grandchildren’s post-secondary education Taxpayers do not receive a tax deduction for contributions to an RESP. However, an RESP can grow tax-free and is eligible for government grants RESP contributions when withdrawn are tax-free. However, any income earned in the RESP and any government grants received is taxable in the hands of the beneficiary (i.e., the children) when withdrawn Taxpayers can contribute any amount, up to an aggregate maximum of $50,000 per child, to an RESP. The maximum amount of government grant is 20% of the annual contribution per child, under 18, up to an annual maximum of $500 per child and an aggregate (i.e., lifetime) maximum of $7,200 per child. Note: how $2,500 x 20% = $500; hence you should contribute $2,500 per year (per child under 18, until you reach the $7,200 maximum)

Registered Disability Savings Plan (RDSP) Allows taxpayers to save money for the benefit of a disabled individual (i.e., someone eligible for the mental or physical impairment credit) The RDSP works like the RESP. Taxpayers do not receive a tax deduction for contributions to an RDSP. However, the RDSP can grow tax-free and is eligible for government grants (which vary depending on family net income) Income earned in the RDSP, and any government grants received, is taxable in the hands of the disabled beneficiary when the beneficiary withdraws the funds Anyone can contribute funds to the RDSP. There is an aggregate lifetime maximum contribution per disabled beneficiary of $200,000