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Have Questions on RRSP, DPSP, RPP, RRIF, Look Here! – Part 3.1

Vol. 10, #12.1 – September 13, 2018  –  ALLAN GOLD’S BLOG

Gold's Legal Minue

“HAVE ?$ on RRSP$, DPSP$, RPP$ RRIF$, LOOK HERE!”


Fifth blog post of series the on Elder Law for seniors and their families, particularly spouses, adult children, caregivers, etc.


BLOG ALERT! We have interrupted the business series to bring you in this space another series, this one on Elder Law, another area of specialization of Attorney Gold.

OPEN LETTER TO READERS FROM A. J. GOLD:

You may or may not know that Elder Law is another area of specialization of mine. Today, I am addressing a big area of concern to everyone, notably money, or as otherwise known, in the parlance of those 50+, Pensions (& Retirement Income). If you’re approaching ‘senior hood’ or already a retiree, I have a few questions for you. 1. “Do you think about your retirement?” 2. “Do you stress over your pensions, be it to be government, company, etc.?” or 3. “Are you concerned about the revenue of an elderly loved one?” If so, you’re in luck. I have written a multi-part blog on topic. Consider it, if you will, something that I call ‘pension education’; or ‘PEN-ED’ for short. The first earlier this month was about company plans, such giving particular emphasis on the problem of pension deficits. The extra one next dealt with making (non-registered) investments to provide for retirement. The second covered governmental plans, particularly focusing on the rules that may lessen your monthly check. And today, I will address registered saving plans, notably the Registered Retirement Savings Plan (RRSP), Deferred Profit Sharing Plan (DPSP), Registered Pension Plan (RPP) and Registered Retirement Income Fund (RRIF), particularly key areas to be addressed quickly. If money is a focus for you, I invite you to continue reading below..

Note. A.J. Gold is the author of the following books:

“Elder Law in Canada*ELIC*” It’s a ground breaking (2,500+ page) legal text, acquired by legal libraries, Bar Associations, and Law Schools. (For testimonials, excerpts etc, please visit www.practitionerspress.com)

 “Estate Document Professor* EDP* (Part of the www.45pluslifehandbook.com* series), informing Canadians everywhere about greater estate preparedness, covering: Last will and testament (will); Power of attorney (POA); Advance medical directive (living will); Trust; Organ donation consent; Estate Inventory and Distribution Survey(For testimonials, excerpts etc, please visit www.practitionerspress.com)

 

TOPIC & PROPOSITION: “Pensions & Retirement Income (Part #3.1): Today, it’s time to address RRSP$, DPSP$, RPP$ and/or RRIF$

   Legalities.

Hereinafter are several pertinent extracts from the Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) – Laws.justice.gc.ca:

Registered Retirement Savings Plan (RRSP)

“• Definitions

207.01 (1) The following definitions and the definitions in subsections 146(1) (other than the definition benefit), 146.1(1), 146.2(1), 146.3(1) and 146.4(1) apply in this Part and Part XLIX of the Income Tax Regulations.

controlling individual , of a registered plan, means

o […]
o (d) the annuitant of a RRIF or RRSP( .particulier contrôlant)

registered plan means a RDSP, RESP, RRIF,  RRSP or TFSA. (régime enregistré”

Section 204.2•

“…Definition of excess amount for a year in respect of registered retirement savings plans

• […]
Marginal note:Cumulative excess amount in respect of RRSPs

(1.1) The cumulative excess amount of an individual in respect of registered retirement savings plans at any time in a taxation year is the amount, if any, by which

o (a) the amount of the individual’s undeducted RRSP premiums at that time

[…]

o (b) the amount determined by the formula

A + B + R + C + D + E

where

A

is the individual’s unused RRSP deduction room at the end of the preceding taxation year,

B

is the amount, if any, by which

 (i) the lesser of the RRSP dollar limit for the year and 18% of the individual’s earned income (as defined in subsection 146(1)) for the preceding taxation year

[…]

Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) (Section 146)

Marginal note:Definitions

• 146 (1) In this section,

qualified investment for a trust governed by a registered retirement savings plan means

o […]
o (c.2) a contract for an annuity issued by a licensed annuities provider where
 […]
 (iii) neither the time nor the amount of any payment under the contract may vary because of the length of any life, other than the life of the annuitant under the plan (in this definition referred to as the “RRSP annuitant”),
 (iv) the day on which the periodic payments began or are to begin (in this paragraph referred to as the “start date”) is not later than the end of the year in which the RRSP annuitant attains 72 years of age,
 (v) either
 (A) the periodic payments are payable for the life of the RRSP annuitant and either there is no guaranteed period under the contract or there is a guaranteed period that begins at the start date and does not exceed a term equal to 90 years minus the lesser of
 (I) the age in whole years at the start date of the RRSP annuitant (determined on the assumption that the RRSP annuitant is alive at the start date), and
 (II) the age in whole years at the start date of a spouse or common-law partner of the RRSP annuitant (determined on the assumption that a spouse or common-law partner of the RRSP annuitant at the time the contract was acquired is a spouse or common-law partner of the RRSP annuitant at the start date), or

RRSP deduction limit of a taxpayer for a taxation year means the amount determined by the formula

A + B + R – C

where

A

is the taxpayer’s unused RRSP deduction room at the end of the preceding taxation year,

B

is the amount, if any, by which

o (a) the lesser of the RRSP dollar limit for the year and 18% of the taxpayer’s earned income for the preceding taxation year

[…]

RRSP dollar limit for a calendar year means

[…]

unused RRSP deduction room of a taxpayer at the end of a taxation year means,

o […]
o (b) for taxation years that end after 1990, the amount, which can be positive or negative, determined by the formula

A + B + R – (C + D)

where

A

is the taxpayer’s unused RRSP deduction room at the end of the preceding taxation year,

B

is the amount, if any, by which

 (i) the lesser of the RRSP dollar limit for the year and 18% of the taxpayer’s earned income for the preceding taxation year

[…]

• […]
Marginal note:Amount of RRSP premiums deductible

(5) There may be deducted in computing a taxpayer’s income for a taxation year such amount as the taxpayer claims not exceeding the lesser of

o […]
o (b) the amount, if any, by which the taxpayer’s RRSP deduction limit for the year exceeds the total of all contributions made by an employer in the year to a pooled registered pension plan in respect of the taxpayer.

Marginal note:Amount of spousal RRSP premiums deductible

(5.1) There may be deducted in computing a taxpayer’s income for a taxation year such amount as the taxpayer claims not exceeding the lesser of

o […]
o (b) the amount, if any, by which the taxpayer’s RRSP deduction limit for the year exceeds the total of all amounts each of which is

[…]

Marginal note:RRSP premium

(5.2) If a taxpayer’s entitlement to benefits under a defined benefit provision of a registered pension plan is transferred in accordance with subsection 147.3(4) after February 2009 and before 2011, there may be deducted in computing the taxpayer’s income for a taxation year that ends on or after the day on which the transfer was made, the amount claimed by the taxpayer in respect of premiums paid by the taxpayer in the year to a registered retirement savings plan under which the taxpayer is the annuitant, not exceeding the amount, if any, determined by the formula

[…]

• […]

Marginal note:Deemed payment of RRSP premiums

(22) If the Minister so directs,

[…]

[…]

• Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) (Section 147.5)

Marginal note:Definitions

• 147.5 (1) The following definitions apply in this section.

unused non-deductible PRPP room , of a taxpayer at the end of a taxation year, means the amount determined by the formula

A – B

where

A

is the amount of the taxpayer’s unused RRSP deduction room at the end of the year, determined in accordance with subsection (33); and

B

is the taxpayer’s unused RRSP ( deduction room at the end of the year.somme inutilisée non déductible au titre des RPAC)

• […]
• (3) A pooled registered pension plan becomes a revocable plan at any time that
o […]
o (c) a participating employer makes contributions to the plan in a calendar year in respect of a member of the plan in excess of the RRSP dollar limit for the year, except in accordance with a direction by the member;
• […]

Marginal note:Member contributions

(11) For the purposes of paragraphs 60(j), (j.1) and (l), section 146 (other than subsections (8.3) to (8.7)), paragraphs 146.01(3)(a) and 146.02(3)(a) and Parts X.1 and X.5, a contribution made to a PRPP by a member of a PRPP is deemed to be a premium paid by the member to an RRSP under which the member is the annuitant.
• […]
• (33) For the purposes of Part X.1 as it applies because of subsection (11) in respect of contributions made to a PRPP,
o […]
o (c) the description of D in paragraph (b) of the definition unused RRSP deduction room in subsection 146(1) is to be read without reference to subparagraph (iv).
[…]

Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) (Section 248)

Marginal note:Definitions

248 (1) In this Act,

registered retirement savings plan or RRSP( have the same meaning as registered retirement savings plan in subsection 146(1); régime enregistré d’épargne-retraite ou REER)

RRSP deduction limit ( has the meaning assigned by subsection 146(1); maximum déductible au titre des REER)

RRSP dollar limit ( has the meaning assigned by subsection 146(1); plafond REER)

unused RRSP deduction room ( of a taxpayer at the end of a taxation year has the meaning assigned by subsection 146(1); déductions inutilisées au titre des REER)

Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) (Section 204.2)

Deferred Profit Sharing Plan (DPSP)

Definition of excess amount for a year in respect of registered retirement savings plans

• […]
• Definition of excess amount for a DPSP

(4) Excess amount at any time for a trust governed by a deferred profit sharing plan means the total of all amounts each of which is

[…]

[…]

Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) (Section 147)

Marginal note:Definitions

• […]
Marginal note:Transfer to RPP, RRSP or DPSP

(19) An amount is transferred from a deferred profit sharing plan in accordance with this subsection if the amount

[…]

[…]

Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) (Section 104)

Marginal note:Reference to trust or estate

• […]
Marginal note:DPSP benefits

(27.1) Where

[…]

Source : http://laws-lois.justice.gc.ca/Search/Search.aspx?txtS3archA11=rrsp&txtT1tl3=%22Income+Tax+Act%22&h1ts0n1y=0&ddC0nt3ntTyp3=Acts

Registered Pension Plan (RPP)

Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) (Section 147.4)

Marginal note:RPP annuity contract

[…]

Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) (Section 147.3)

Marginal note:Transfer — money purchase to money purchase, RRSP or RRIF

• […]
Marginal note:Transfer to RPP, RRSP or RRIF for spouse on marriage breakdown

(5) An amount is transferred from a registered pension plan in accordance with this subsection if the amount

[…]

[…]

Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) (Section 147)

Marginal note:Definitions

• […]
Marginal note:Transfer to RPP, RRSP or DPSP

(19) An amount is transferred from a deferred profit sharing plan in accordance with this subsection if the amount

[…]

[…]

Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) (Section 146.3)

Marginal note:Definitions

• […]
Marginal note:Transfer to PRPP or RPP

(14.1) An amount is transferred from a registered retirement income fund of an annuitant in accordance with this subsection if the amount

[…]

[…]

Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) (Section 20)

Marginal note:Deductions permitted in computing income from business or property

• 20 (1) Notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto
o […]
o Marginal note:Employer’s contributions to RPP or PRPP
(q) such amount in respect of employer contributions to registered pension plans or pooled registered pension plans as is permitted under subsection 147.2(1) or 147.5(10);

Registered Retirement Income Fund (RRIF)

Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) (Section 146.3)

Marginal note:Definitions

146.3 (1) In this section,

qualified investment for a trust governed by a registered retirement income fund means

o […]
o (b.2) a contract for an annuity issued by a licensed annuities provider where
 […]
 (iii) neither the time nor the amount of any payment under the contract may vary because of the length of any life, other than
 (A) if the annuitant under the fund (in this paragraph referred to as the “RRIF annuitant”) has made the election referred to in the definition retirement income fund in respect of the fund and a spouse or common-law partner, the life of the RRIF annuitant or the life of the spouse or common-law partner, and
 (B) in any other case, the life of the RRIF annuitant,
 […]
 (v) either
 (A) the periodic payments are payable for the life of the RRIF annuitant or the joint lives of the RRIF annuitant and the RRIF annuitant’s spouse or common-law partner and either there is no guaranteed period under the contract or there is a guaranteed period that begins at the start date and does not exceed a term equal to 90 years minus the lesser of
 (I) the age in whole years at the start date of the RRIF annuitant (determined on the assumption that the RRIF annuitant is alive at the start date), and
 (II) the age in whole years at the start date of a spouse or common-law partner of the RRIF annuitant (determined on the assumption that a spouse or common-law partner of the RRIF annuitant at the time the contract was acquired is a spouse or common-law partner of the RRIF annuitant at the start date), or

[…]

Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) (Section 60.022)

Marginal note:Additions to clause 60(l)(v)(B.2) for 2015

60.022 (1) In determining the amount that may be deducted because of paragraph 60(l) in computing a taxpayer’s income for the 2015 taxation year, clause 60(l)(v)(B.2) is to be read as follows:
o (B.2) the total of all amounts each of which is
 […]
 (II) the taxpayer’s eligible RRIF withdrawal amount (within the meaning of subsection 60.022(2)) for the year in respect of a RRIF,

Marginal note:Eligible RRIF withdrawal amount

(2) A taxpayer’s eligible RRIF withdrawal amount for the taxation year in respect of a RRIF under which the taxpayer is the annuitant at the beginning of the taxation year is the amount determined by the formula

[…]

[…]

Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) (Section 147.3)

Marginal note:Transfer — money purchase to money purchase, RRSP or RRIF

• […]
Marginal note:Transfer — defined benefit to money purchase, RRSP or RRIF

(4) An amount is transferred from a registered pension plan in accordance with this subsection if the amount

[…]

• […]
Marginal note:Transfer to RPP, RRSP or RRIF for spouse on marriage breakdown

(5) An amount is transferred from a registered pension plan in accordance with this subsection if the amount

[…]

• […]
Marginal note:Withdrawal of excessive transfers to RRSPs and RRIFs

(13.1) There may be deducted in computing the income of an individual for a taxation year the lesser of

[…]

[…]

Income Tax Act – R.S.C., 1985, c. 1 (5th Supp.) (Section 60.021)

Marginal note:Additions to clause 60(l)(v)(B.2) for 2008

60.021 (1) In determining the amount that may be deducted because of paragraph 60(l) in computing a taxpayer’s income for the 2008 taxation year, clause 60(l)(v)(B.2) shall be read as follows:
o (B.2) the total of all amounts each of which is
 […]
 (II) the taxpayer’s eligible RRIF withdrawal amount (within the meaning assigned by subsection 60.021(2)) for the year in respect of a registered retirement income fund, or…”

RRSPs etc.: Commentary.

“What’s in a name?” In starting my analysis, I’m reminded of the question, “What’s in a name?” When it comes to (personal) saving plans relative to retirement, the answer is a lot. Each included word contributes an element to its essence. Please read on and you’ll see what I mean.

Registered Retirement Savings Plan (RRSP).
The first and second words, “registered” and “retirement” taken together mean that the investment account is registered with the governmental authorities, such signifying that the monies therein are locked-in. And since the income tax is deferred, you’ll pay the tax, if and when, you withdraw the funds therefrom. The word, “retirement” signifies that the benefits are for the time once you discontinue paid work, presumably after the age of 65 and into your golden years. The sub-plot is about investing and being an investor: Of course, you’re continually trying to invest wisely, choosing the right type, selecting only those being safe and sound, opting for those, amongst the available offerings, which will pay off big time. In other words, it’s not good enough to take a chance, doing this on a wing and a prayer. And it’s not acceptable to be hopeful without reason, as to how things are going to turn out. Of course, success is never easy. One thing is for sure, when it comes to retirement savings-investments, you need to get into the habit of making informed decisions. (N.B. This savings vehicle is possible until December 31 of the year in which you turn 71.)

The third word “savings” indicates that you’re ‘a saver, but not just in a general way, but rather, specifically for your retirement. As such, you know: (a) That if you don’t save, once you’ll retire, you’ll have nothing from which, to draw down. Of course, nothing from nothing is nothing. And if you want something to provide benefits over and above the OAS base, you must be a saver. And I say: “If you want to be a ‘happy retiree’, saving is the way to go from here.” (b) That it’s difficult to take your hard-earned money and set it aside for the proverbial rainy day which is retirement. Let’s also agree that it’s tough because you want to sock away a goodly sum for tomorrow, yet still pay your bills and also maintain a desirable standard of living today. I say that “When the going gets tough, the tough get going.” So treat the immediate pressures as distractions, and make sacrifices now and in the immediate future.”

The fourth word “plan” means that you’re a planner, having a goal and also a step-by-step approach in building your nest egg for retirement. Most people will say that going helter-skelter is bad news since you’ll probably go off on a tangent and lose valuable time. Of course, having a plan is better since it aids in reducing confusion– this is a danger point because it’s the precursor of an error. Indeed, a financial plan could be a beautiful thing!

In my belief, a future retiree has trebled intents and purposes when on this long, winding road to retirement income heaven. He/she wears three hats, one of a saver, one of an investor and the last of a planner. In this three -headed personal universe with each persona vying for dominance, many people on this triple purposed course, get fatigued, and opt for alternatives by default. I think that regardless of having a triparte personality, you can always do better. And that’s the raison d’être of this blog post.

Registered Pension Plan (RPP)
Since there is commonality with some words in the RRSP, the foregoing comment applies hereto. But in this instance, we are not speaking of a personal saving investment, but instead a “pension”. And as you know from an earlier blog, such signifies “1. a regular payment made during a person’s retirement from an investment fund to which that person or their employer has contributed during their working life.”(Source: https://www.google.com/search?q=pension+definition&ie=utf-8&oe=utf-8&client=firefox-b-1)

Deferred Profit Sharing Plan (DPSP)
The first word “deferred” indicates something delayed. The second and third words, “profit” and “sharing” taken together mean a method of sharing profits. When the first word is added to the mix, the taking of one’s share is postponed. By implication, so is the tax thereon. The formal definition is: “A deferred profit sharing plan (DPSP) is an employer-sponsored Canadian profit sharing plan that is registered with the Canadian Revenue Agency. DPSPs are a type of pension. On a periodic basis, the employer shares the profits made from the business with all employees or a designated group of employees.” (Source: https://www.google.com/search?client=firefox-b-1&ei=uD-NW7ufErGxggeClYj4CA&q=%E2%80%A2%09Deferred+Profit+Sharing+Plan+definition&oq=%E2%80%A2%09Deferred+Profit+Sharing+Plan+definition&gs_l=psy-ab.12…265542.265542.0.267968.1.1.0.0.0.0.142.142.0j1.1.0….0…1c..64.psy-ab..0.0.0….0.ZID6gYENH2w)

Registered Retirement Income Fund (RRIF)
Since there is commonality with some words from the name of the RRSP, the foregoing comment also applies hereto. But in this instance, we are speaking of an “income fund”, not a personal saving investment. The formal definition is “a tax-deferred retirement plan under Canadian tax law. Individuals use an RRIF to generate income from the savings accumulated under their Registered Retirement Savings Plan. As with an RRSP, an RRIF account is registered with the Canada Revenue Agency…. (Source: https://en.wikipedia.org/wiki/Registered_Retirement_Income_Fund) But here’s something really important. While you may move your money out of your RRSP at anytime, it will be taxable, unless you convert it to the special tax deferred vehicle known as RRIF. Indeed, it is a popular way to use your RRSP savings to generate retirement income while continuing to have taxes deferred on your investment growth.

Investing 101 Basics. KNOW that I’m in no way an investment expert. However, I’ve learned a little. For me, I’m a fan of Dividend Yield – Indeed, I want revenue from profits. Now here’s a thought about “Capital Appreciation.” It is “often a stated investment goal of many mutual funds. … Investments targeted for capital appreciation tend to have more risk than assets chosen for capital preservation or income generation, such as government bonds, municipal bonds or dividend-paying stocks.” (Source: https://www.google.com/search?client=firefox-b-1&ei=0WdQW9iLCenc5gLKj7rQBg&q=capital+preservation+vs+capital+appreciation&oq=Capital+preservation+vs+Capital+Appreciation&gs_l=psy-ab.1.0.35i39k1.65188.80400.0.82318.30.27.0.0.0.0.148.2732.15j12.27.0….0…1c.1.64.psy-ab..8.19.1864…0j0i8i7i30k1j0i7i30k1j0i7i5i30k1j0i8i30k1.0.N0fiEr-J9jw) And then there’s the cross pressure between desires for “Growth vs Value: “two approaches to stock investing. Growth and value are two fundamental approaches, or styles, in stock and stock mutual fund investing. 1 Growth investors seek companies that offer strong earnings growth while value investors seek stocks that appear to be undervalued by the marketplace.”(Source: https://www.google.com/search?client=firefox-b-1&ei=GGhQW4SkHaeL5wKeoryoDQ&q=value+investing+vs+growth+investing&oq=value+investing+vs+growth+investing&gs_l=psy-ab.12..35i39k1j0i22i30k1l2.62672.62672.0.64352.1.1.0.0.0.0.104.104.0j1.1.0….0…1c..64.psy-ab..0.1.102….0.MoZ-YGpK_Pc) Indeed, you might understand the difference, but you really want some of both!

Consume Today or Defer Spending. Once you retire, I raise another issue. It is framed in the question: “Is it better to consume today or instead, save and defer personal spending in the short term until later?” For me, the right answer is “Yes and no.” Here’s why.

“YES”. The rationale under-pinning a “Yes” answer comprises several arguments. The first reason to consume today could be driven by the argument of increasing inflation, rising prices. Or the push now might be due to age and risk of declining health. Of course, you might say: “I’m not getting any younger.” Another reason for acting without delay might be changing circumstances. You might say: “Chances are that if I don’t do it now, conditions later may be such that I may not be able to then do it.” All of this may be true. But this could leave you dealing with big money troubles afterwards. For me, this option is simplistic, short-sighted and isn’t really great. And when tomorrow comes, it might be too late. Indeed, you may not be able to make things right, and say” Now what?” Sadly, the reply is “Probably not much and nothing really good.”

“NO”. The “No” answer could be predicated on feelings that spending is not really an option because of the fear that you will run out of money half way into your retirement. That’s why you’re intent on saving and saving some more, repeatedly delaying expenditures to some day …way in the future. But here’s the thing. That day may never come and even if it does, you may then not be well enough to do what you want to do. And then you’ll probably have regret, be despondent and say: I missed the boat!”

“YES & NO”. The “Yes and No” answer could be predicated on finding an intermediate point, somewhere in between saving every nickel and spending modestly, doing some of what you really desire while you’re still healthy and able to do it .

* ©/TM 2005, 2008 Allan Gold, Practitioners’ Press Inc. – ALL RIGHTS RESERVED
** ©/TM 2015, 2016, 2017, 2018 Allan Gold, Practitioners’ Press Inc. – ALL RIGHTS RESERVED