Canadian Retirement Planning: RRSP, CPP, OAS, and Tax Rules
RRSP Contribution Rules and Limits
Calculating the RRSP Limit
The RRSP Limit is calculated as: Lesser of (18% of earned income, RRSP dollar limit) minus Pension Adjustment (PA) plus Unused RRSP Room.
The RRSP Dollar Limit for 2023 is $30,780.
Earned Income vs. Excluded Income
Earned Income includes:
- Employment income
- Net business income
- Net rental income
- Taxable alimony
- CPP disability benefits
Excluded Income includes:
- Investment income
- Pension income
- Severance pay
Pension Adjustment (PA)
The Pension Adjustment (PA) reduces RRSP contribution room for those participating in employer-sponsored plans.
Defined Contribution Plans (DCPP)
PA equals the Total contributions by employee and employer.
Defined Benefit Plans (DBPP)
PA equals (Pensionable earnings × Benefit rate) – $600.
Unused RRSP Room
Unused contribution room from previous years can be carried forward indefinitely.
Spousal RRSP Rules
A high-income spouse can contribute to the RRSP of the lower-income spouse to facilitate income splitting in retirement.
Spousal RRSP Withdrawal Taxation
- Within 2 Years of Contribution: The amount is taxed in the contributor’s income.
- After 2 Years: Withdrawals are taxed in the recipient’s income.
RRSP Deductions and Carry Forward
Contributions can be made without claiming the deduction in the same year. Deductions can be carried forward to future years, allowing the client to claim them when they are in a higher tax bracket.
Canada Pension Plan (CPP) Essentials
CPP Contributions and Eligibility
- Eligibility: Everyone in Canada aged 18 or older with earned income.
- Contribution Rate (2023): 5.95% for employees and employers (11.9% for self-employed individuals).
Calculating Pensionable Earnings
Pensionable Earnings are calculated as: Lesser of (Earned Income, YMPE) minus YBE.
- YMPE (Yearly Maximum Pensionable Earnings) 2023: $66,600
- YBE (Yearly Basic Exemption) 2023: $3,500
CPP Retirement Benefits
- Full CPP at Age 65: Based on contributions and years of contribution.
- Early CPP (Age 60): Reduced by 0.6% per month (7.2% per year).
- Late CPP (Age 70): Increased by 0.7% per month (8.4% per year).
CPP Survivor and Disability Benefits
Survivor Benefits
- Lump Sum Death Benefit: $2,500.
- Survivor Pension: Up to 60% of the deceased’s CPP entitlement.
Disability Benefits
Paid to contributors who are disabled. Dependent children of disabled contributors also receive benefits.
Old Age Security (OAS) and GIS
OAS Eligibility and Clawback
To be eligible for Old Age Security (OAS), you must:
- Be a Canadian citizen or legal resident.
- Have lived in Canada for at least 10 years after age 18.
OAS Clawback (Recovery Tax)
If net income exceeds $80,000, OAS benefits are reduced by 15% of the excess. Full clawback occurs at approximately $130,000 (figures subject to annual change).
OAS Deferral Benefits
OAS can be deferred up to age 70. Benefits increase by 0.6% per month (7.2% per year) for each year deferred.
Guaranteed Income Supplement (GIS)
- Eligibility: Low-income seniors receiving OAS.
- Reduction Rate (Single): GIS is reduced by $1 for every $2 of “other income” (e.g., CPP, RRSP withdrawals).
- Reduction Rate (Couples): The reduction is $1 for every $4 of combined income.
- Tax Status: GIS is not included in taxable income.
RRIF and Annuity Fundamentals
Registered Retirement Income Fund (RRIF)
Minimum Withdrawal Calculation
Minimum Withdrawal = FMV of RRIF × Age Factor
The Age Factor is calculated as 1 / (90 – age) for ages 71 and older.
RRIF Taxation
- Withdrawals: Fully taxable as income.
- Excess Withdrawals: Subject to withholding tax.
Types of Annuities and Taxation
Annuity Types
- Life Annuity: Provides payments until death.
- Term Certain Annuity: Provides payments for a fixed period.
- Indexed Annuity: Payments increase with inflation.
- Joint-Survivor Annuity: Payments continue to a surviving spouse.
Tax Implications
Annuity payments are fully taxable as income.
Retirement Taxation and Estate Planning
Taxation in Retirement
RRSP and RRIF withdrawals are fully taxable as income.
Deemed Disposition and Spousal Rollover
Deemed Disposition at Death
Assets are deemed sold at their Fair Market Value (FMV) upon death, potentially triggering capital gains tax.
Spousal Rollover
Assets transferred to a spouse or spousal trust are generally not taxed immediately. The executor can elect out of the rollover for specific assets if beneficial for tax planning.
TFSA (Tax-Free Savings Account)
- Contributions: No tax deduction is received.
- Growth: Investments grow tax-free.
- Withdrawals: Withdrawals are tax-free, and the withdrawn amount is added back to contribution room the following year.
Estate Planning Considerations
- Assets transferred through a will are subject to probate fees.
- Jointly held assets or assets with named beneficiaries bypass probate.
Key Retirement Tax Credits and Financing
Medical Expense Tax Credit (METC)
- Eligible Expenses: Prescriptions, paramedical services, attendant care, and long-term care.
- Threshold: Lesser of $2,635 or 3% of net income.
- Transferability: Excess medical expenses can be transferred to a supporting family member.
Disability Tax Credit (DTC)
- Eligibility: Severe and prolonged disability affecting daily living (e.g., walking, feeding, dressing).
- Base Amount (2023 estimate): Approximately $9,428.
- Transferability: Can be transferred to a supporting family member if the disabled individual does not require the full credit.
Pension Income Splitting
- Eligible Income: Includes annuity payments from RRSPs, RPPs, DPSPs, RRIFs, and LIFs.
- Age Requirement: Must generally be over 65 (some exceptions apply).
- Benefit: The recipient of the split income can claim the pension income tax credit (up to $2,000).
Reverse Mortgage Eligibility
- Age Requirement: 55 years of age or older.
- Loan Amount: Up to 55% of the future value of the home.
- Tax Implications: Cash received is tax-free, but interest may be deductible if the funds are invested.