Vol. 12, #17.2 – March 2nd, 2020– ALLAN GOLD’S BLOG
By Allan Gold, lawyer, lecturer and author.
WONDERING ABOUT RRSP? HURRY- LAST MINUTE ALERT!!
GOLD’S TOP-10 QUESTIONS
That Canadians really wonder about! (Part #2)
Psst!!! Today is your last opportunity to make your RRSP contribution for this year! Historically, many people wait until the final moment before attending to their RRSP. That\s why I thought it expedient to give you some last minute information, which I’m sure that you’ll find of interest and perhaps even helpful at this 11th hour!
- GOLD’S TOP-10 QUESTIONS
“RRSP is a great topic. People have questions. Last week, we started the countdown of GOLD’S TOP-10 WONDERFUL QUESTIONS. We’ve already done numbers 10 through 6. I’m sure that you’re wondering about the rest. So let’s continue counting them down!
#5- RRSPs: Protected in bankruptcy, Seizable, etc.
5.1 Protected in bankruptcy?
Q. Are RRSPs protected in bankruptcy?
A. Yes and no. For the answer, I looked to the Bankruptcy and Insolvency Act (BIA). Since 2008, there is thereunder some protection for certain registered accounts, notably Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs) and Deferred Profit Sharing Plans (DPSPs), but NOT Registered Education Savings Plans (RESPs). Indeed, they’re exempt from seizure in bankruptcy, except for contributions made in the 12-month period leading up to the bankruptcy. This means that the trustee may still attack and successfully seize any property contributed to an RRSP, RRIF or DPSP within the 12 months preceding the date of bankruptcy. (N.B. This does not speak to the situation of the creditor claim before bankruptcy.)
5.2 Seizable if not bankrupt?
Q. If the debtor is not bankrupt, can a creditor execute a judgment, seizing an RRSP account?
A. Yes and no. It depends upon the legislation in your home province. The short answer is that certain RRSPs and RRIFs are fully protected from creditors, but this protection is subject to certain conditions, notably (a) That the proceeds are held under a life insurance contract; (b) That the proceeds have not been deposited fraudulently to avoid paying creditors; and (c) That the insurance policy names a beneficiary. The long answer is as follows.
- Quebec: Pursuant to Insurance law and the Quebec Civil Code, protection is given where the object RRSP is offered by insurers and trust companies. Such a contract must qualify as an annuity contract and have a named beneficiary in one of these categories: a married or a civil union spouse (not common law spouse), ascendants or descendents of the owner, or anyone named as an irrevocable beneficiary. (N.B. Benefits paid under the Act respecting the Québec Pension Plan are also exempt.)
- British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island (PEI), Newfoundland & Labrador: There is protection from creditors for assets in a Registered Retirement Savings Plan (RRSP) and a Registered Retirement Income Fund (RRIF). Investments therein made through an insurance company are generally protected from creditors (in bankruptcy and) non-bankruptcy situations provided that the beneficiary designation is irrevocable or a spouse or common law partner, child, parent or grandchild, of the annuitant.
#4- Age being a factor Re: RRSP
#4.1- When Making Contributions
Q. What is the last year that a person is eligible to contribute?
A. Unfortunately, there’s a maximum age in the instance of RRSPs. The year is the one when you turn 71 years of age. And December 31st of that year is the last day you can contribute to your own RRSP.
#4.2- When Opening the RRSP
Q. At what age, can you begin an RRSP account?
A. And now for some unexpected good news. As to the opening of an RRSP, a plan may be begun for someone provided he or she has a social insurance number (SIN). You see the rule is that as long as a Canadian has employment income and files a tax return, he or she (or his/her guardian) may set up and contribute to an RRSP. This means that a plan may be established for a minor child provided that these conditions are met. (N.B. This contrasts with the situation of a tax-free savings account (TFSA), which requires a Canadian to be at least 18 years of age.)
#3.1- Borrow to contribute?
Q. Can one take a loan in order to get the funds to make an RRSP contribution?
A. Yes, you can borrow to make such a contribution. For example if you have a bit of money to contribute, but want to pay down more or even max out your RRSP contribution eligibility, you may borrow the difference. And here’s the kicker. Upon receiving your tax refund, you can immediately use it to pay down the loan. But this does not bring an assurance that you can you take a deduction for the interest paid thereon, thusly reducing your taxable income.
#3.2- Deduct Interest?
Q. Can one deduct the interest paid on a loan to fund an RRSP contribution?
A. No, you cannot write off the interest on loans to invest in an RRSP. Sadly, such interest is not deductible. Sorry about that.
#2- RRSP vs. 401k vs.TFSA.
Q. Are they all the same?
A. No. Here’s why.
#2.1 – 401k?
Q. Can a Canadian start a 401k account as seen on American television?
A. No, this is the creation of U.S. law and is only available to Americans. For your information, a 401(k) plan is a company-sponsored retirement account to which employees can contribute. Generally, a contributor will be able to reduce his/her income taxes for the year the contribution(s) are made, but their withdrawals are taxed. (N.B. While the RRSP is comparable to the 401k, we do things a little different in Canada; and I say, “Vive la difference!”)
#2.2- RRSP versus TFSA
Q. What about the choice between RRSP and TFSA?
A. It’s a matter of apples and oranges – they’re just different. Simply put, the RRSP is a tax-deferred account. This means that you contribute to it with pre-tax dollars and you’ll pay your income taxes on your withdrawals. In contrast, the TFSA is a tax-free account. This means that you contribute to it with after-tax income, so you’ll pay no more income taxes when you make a withdrawal. As a result, there are pros and cons of investing in each. You decide!
AND NOW FOR THE NUMBER #1 QUESTION ON RRSP THAT CANADIANS DO WONDER ABOUT. I’M SURE THAT YOU’VE BEEN AWAITING THIS REVEAL WITH BATED BREATH. FOR ME, THERE’S A GENERAL LACK OF COMPREHENSION AS TO THE MEANS OF DETERMINING HOW MUCH A TAXPAYER CAN LEGALLY CONTRIBUTE TO HIS/HER RRSP, THIS BEFORE GETTING INTO AN OVER CONTRIBUTION SITUATION. AND THAT MAKES A QUESTION WITH RESPECT THERETO, MY “NUMERO UNO!”
#1- RRSP Maximum Contribution.
1.1 Deduction Limit?
- Can you contribute as much as you want to an RRSP and get your deduction?
- No, there is a deduction limit.
1.2 Means of calculation RRSP yearly limit
- How does the Canada Revenue Agency (CRA) calculate your maximum allowable contribution in any one year?
- The simplistic answer is that a contribution to an RRSP for one year depends on your earned income from the previous year and then you take eighteen percent (18%) of that. For example, if you earned $60,000 in 2018, the limit in 2019 is $10,800. This said, there’s another limit – we call it a cap. Should you have an elevated income, there’s a cap on the RRSP contribution at the top revenue level. (N.B. For 2019, your contribution will be limited to 18% of your 2018 earned income, to a maximum of $26,500 plus any carry-forward contribution room that you may have.)
1.3 Contribution Room
Q. Is there any regulation over RRSP deduction room?
A. Yes, there’s a rule for that too! You see, there’s the RRSP Contribution Room Carry Forward Rule, whereby you can carry forward the RRSP contribution room that you are unable to use in any particular year. This unused contribution room can be carried forward indefinitely…well, until you turn 71 years of age, at which time you can no longer have an RRSP account.
So there you have it. I repeat the questions put at the outset. Retirement planning? Contribute to an RRSP? Concerned about senior living? Thinking about Seniors and money? If you answered yes to any of them, you’re now more knowledgeable on these topics. And if you’ve been asking yourself, What’s an RRSP? What are the benefits of an RRSP? Do Canadians wonder how RRSPs work? Which is better RRSP or TFSA? you’re now better informed. Indeed, with the answers to Gold’s TOP-10 questions that Canadians really wonder about; you’re better able to make a reasoned RRSP decision.
Bottom line, I recommend that you contribute to RRSP each and every year and in as large amounts as you can possibly afford. And you can quote me on this!
P.S. If you’re unsure about the precise RRSP investment for this year, just put it, before the deadline, into an open deposit type account and then schedule an appointment with your financial advisor in the coming weeks to decide upon its ultimate placement.
P. P.S. Last question. What does “R” “R” “S” “P” spell? In my book, that spells another step on the road to a good retirement!*
D. PREVIEW OF NEXT IN THE ELDER LAW BLOG SERIES.
I believe that with this blog series, I may have started you along the way to being more aware of elder law. I will continue on with the subject of retirement planning, more particularly, RRSP and will continue on with the intriguing topic of the self-directed RRSP. Yes, Virginia, there’s such a thing as “do it yourself RRSP” Now what an intriguing thought is that? Interested? Want to get more information about the current topic, retirement planning, or other areas of elder law written by an “avocat,” one of the family law lawyers, family lawyers Montreal, practicing in the elder law field? See you next time. It won’t take too much time. Remember my byline – it’s “Gold’s Legal Minute*GLM*!” And please don’t forget to join my professional community by entering your e-mail at the prompt.*
E. NOTICE – CAUTION –DISCLAIMER.
The material provided herein is of a general nature, strictly for informational purposes. The interpretation and analysis is not to be misapplied to a personal situation with a particular set of facts. Under no circumstances, are the herein suggestions and tips, intended to bring a reader to the point of acting or not acting, but instead, the hope is that they are to be a cause for pause and reflection. It is specifically declared that this content is not to be a replacement of, or a substitution for, legal or any other appropriate advice. To the contrary, for more information on these presents, related subjects or any other questions, it is the express recommendation of the author that everyone seek out and consult a qualified professional or competent adviser.
* ©/TM 2020, 2019, 2015-2018, Allan Gold, Practitioners’ Press Inc. – ALL RIGHTS RESERVED
** ©/TM 2006, 2008, 2018 Allan Gold, Practitioners’ Press Inc. – ALL RIGHTS RESERVED