A Registered Retirement Savings Plan (RRSP) is basically a form of savings account, which offers tax benefits regarding retirement savings in Canada. The RRSP indicates towards a stipulated condition under the Income Tax Act, which permits an individual in sheltering financial assets against income tax.
With the help of RRSPs, taxes can be diminished in three modes:
- By contributing to RRSPs up to the permissible limits the amount can be withheld from the earnings of an individual prior to the computation of income tax that is outstanding.
- Earnings received inside the account (capital gains, interest, distributions from trusts, and corporate dividends) are not taxable till the time there is withdrawal of money from the program. This enables the program to increase at a more rapid pace in comparison to the growth of the similar type of investments in case they are maintained externally from the plan and hence taxable.
- Withdrawal of money can be made from a Registered Retirement Savings Plan in taxation years while an individual is falling within a smaller income tax bracket due to diminished earnings (resulting from job loss and retirement) in comparison to the tax years while the individual contributes.
The financial assets, which can be maintained under an RRSP, include the following:
- Guaranteed Investment Certificates or GICs
- Savings Accounts
- Mortgage loans
- Income trusts
- Mutual funds
- Labor-sponsored funds
- Corporate stocks or shares
The Registered Retirement Savings Plans are forms of tax-deferred investments for the investors. Mostly, the amount contributed to RRSPs is allowable from taxable earnings and in this way, the amount of income tax payable is diminished. Canada has a progressive tax infrastructure and the taxes are diminished at the maximum marginal rate. Growth in the value of the RRSP properties (be it interest earnings, capital gains, and many others) are not taxable under the income tax or any other types of tax in Canada till money is withdrawn from the RRSP.
The RRSP accounts can be opened by one or two related persons and they are broadly categorized into the following two types:
- Individual RRSP: An individual RRSP is related to only one person and he or she is known as an account holder. The account holders of individual RRSPs are also known as contributors simply because of the reason that they contribute cash towards the RRSP plan.
- Spousal RRSP: A Spousal RRSP permits an individual with higher level of income (known as a spousal contributor) to make contributions towards an RRSP in the name of the spouse. In this type of circumstances, the account holder is the spouse. The spouse has the option for withdrawing the money after a certain period for which the funds are held, nevertheless, they are taxable. A spousal RRSP is a method of dividing earnings in retirement. If the investment assets are split between both spouses, every spouse would be obtaining 50% of the earnings. Therefore, the marginal tax rate would be lesser in comparison to the situation where either of the spouses has received the total earnings.
The account structures for RRSPs can be categorized into the following types:
- Client-held accounts: Client-held accounts are also known as client name accounts and are those accounts where the account holder utilizes the contributions of RRSP for buying an investment from a specific investment firm.
- Nominee accounts: The nominee accounts are those accounts where the account holders have the option to nominate an entity, normally among the five major banks of Canada or a principal investment dealer for maintaining various investments under one exclusive account.
- Intermediary accounts: The intermediary accounts are basically similar in characteristics to nominee accounts. The purpose of keeping an intermediary account rather than a nominee account is dependent on the investment consultant the investors are transacting with.
Each of the above mentioned accounts could be opened with the help of an investment advisor.
The special withdrawal programs under the RRSP are the following:
- HBP or Home Buyer’s Plan
- LLP or Lifelong Learning Plan
Last Updated on : 23rd June 2015