Unit 8: Pensions and Retirement

Unit 8: Pensions and Retirement Welcome to Pensions and Retirement. In this unit, you will learn about the various types of public and private savings plans. You will learn about the different types and features of RRSPs and the rules surrounding contribution limits. Retirement planning is a priority for most Canadians. It is important for you to understand how these plans work, and how your clients can benefit from them. This unit takes approximately 2 hours and 40 minutes to complete. You will learn about the following topics: Savings Plans Features of an RRSP Types of RRSPs RRSP Contribution Limits Withdrawing from RRSPs RRSP Strategies To start with the first lesson, click Savings Plans on the table of contents. Lesson 1: Government-sponsored Savings Plans Welcome to the Government-sponsored Savings Plans lesson. In order to create a sound investment strategy for your clients, you need to understand the types of federal government plans that are available. It should take approximately 25 minutes to complete. At the end of this lesson, you will be able to do the following: identify ways in which people finance their retirement describe the Canada Pension Plan (CPP) describe the Québec Pension Plan (QPP) describe Old Age Security (OAS) describe the Guaranteed Income Supplement (GIS) How Do People Finance their Retirement? Many Canadians share the investment goal of having a comfortable retirement. Most of us expect to retire at age 65 or earlier with enough post-retirement income to maintain the standard of living we enjoyed before leaving our jobs. To do that we must develop an investment strategy that allows us to have enough money at retirement to generate the income needed to finance our retirement lifestyle. Any investment strategy includes some of the following: government-sponsored retirement programs employer-sponsored pension plans RRSPs other savings other assets (to be sold later in life) 2010 IFSE Institute 1

Government-sponsored Retirement Programs There are two main government-sponsored programs that can help finance retirement. These plans are the following: Canada Pension Plan (CPP)/Québec Pension Plan (QPP) Old Age Security (OAS) Canada Pension Plan The Canada Pension Plan (CPP) is a federally-administered program designed to provide the following: retirement benefits disability benefits survivor benefits death benefits CPP is payable to all eligible Canadians except those who worked in Québec. (The Québec Pension Plan, which is sponsored by the Québec provincial government, provides similar benefits to Québec workers.) The value of your monthly pension relates to past CPP contributions made on your pensionable employment earnings. In the case of the retirement pension, the age at which you choose to commence receiving benefits affects the value. The CPP program is designed to replace about 25% of your pre-retirement earnings. For more information about CPP, click here to view the Human Resources & Skills Development Canada (HRSDC) website. Québec Pension Plan The Québec Pension Plan (QPP), sponsored by the Québec provincial government, provides benefits similar to those offered by the Canada Pension Plan (CPP) to workers in Québec. (The CPP does not apply in Québec.) The federal government and the Québec provincial government closely coordinate the CPP and QPP. If you work in Québec, then you must contribute to the QPP. If you reside in Québec but work in another province, then you contribute to the CPP. If you contributed to both plans and reside in Québec when you apply for benefits, then you apply to the QPP. Otherwise, if you live anywhere else in Canada, you would apply to the CPP. CPP contributions are placed in a pool of funds, from which provinces can borrow, while QPP contributions are placed in a pension investment fund administered by the Caisse de Dépôt et Placement du Québec. The Caisse is the portfolio manager for various Québec public pension and insurance funds. For more information on the QPP, click here to view the Government of Québec website. Who Contributes to CPP/QPP? You must contribute to the CPP/QPP if you do the following: work in Canada are over 18 years of age have pensionable employment income exceeding the year's basic exemption 2 2010 IFSE Institute

Payments into the CPP/QPP are tax-deductible for your employer and a tax credit for you. Since 2001, if you are self-employed, you can deduct half your contribution and claim a tax credit for the other half. Contributions from any employment income continue until you begin drawing retirement income from either plan or you reach age 70. Making CPP/QPP Contributions CPP/QPP payments are based on mandatory contributions made by workers and their employers. Self-employed individuals are required to make both the employee and the employer portions of the contribution. Some facts about CPP/QPP calculations: Contributions are calculated based on a percentage of your annual earnings between the minimum (known as the year's basic exemption) and maximum levels (known as the year's maximum pensionable earnings). Exemptions Income below the year's basic exemption (YBE), currently $3,500, is not included in the calculation. As well, anyone earning less than the YBE is not required to contribute to CPP/QPP. If you earn more than the YBE, then your contributions are based on the difference between your income and the YBE, up to the maximum pensionable earnings level ($47,200 for 2010). The contribution percentage for 2010 was 9.9% (4.95% employer's portion; 4.95% employee's portion). For example in 2010, the maximum employer and employee contribution to the plan was $2,163.15, calculated as [(YMPE - YBE) x 4.95%] or [($47,200 - $3,500) x 4.95%. The maximum self-employed contribution was $4,326.30, or ($2,163.15 x 2). Click here for more current and historical information on CPP contributions. Collecting CPP/QPP Benefits Benefits received under either the Canada or Québec Pension Plans are taxable. Retirement before age 65 You may choose to collect your CPP retirement pension any time between the ages of 60 and 70. If you choose to receive your pension between 60 and 65, you must have substantially stopped working. This means you are earning less than the maximum monthly CPP pension amount in the month before your pension begins and the month in which it begins. Once you are receiving your pension, if your income goes above this limit, it will not affect your CPP retirement pension. You may continue working as much as you want, but may not make further CPP contributions. However, by starting your pension early, the amount of your pension is reduced by 0.5% for each month remaining until your 65th birthday. This means if you start collecting on your 60th birthday, you receive only 70% of the full benefit. Retirement after age 65 If you delay your CPP pension, the amount of your pension is increased by 0.5% for every month after your 65th birthday until age 70. You must start to receive your pension once you turn 70. So if you start receiving payments at age 70, you would get 30% more than if you were to begin collecting at age 65. 2010 IFSE Institute 3

Survivor, disability, and death benefits In addition to retirement benefits, CPP/QPP also pay survivor, disability, and death benefits. For example, if you die, your estate will receive a lump-sum death benefit payment of up to $2,500. Your surviving spouse or common-law partner may also receive monthly payments. These payments are less for partners younger than 65, and are indexed to rise with inflation. The CPP/QPP are extremely complex programs. For more detailed information, you can contact Human Resources & Skills Development Canada (HRSDC). Exercise: CPP & QPP Old Age Security Program The Old Age Security program includes three public pension benefits: Old Age Security (OAS) Guaranteed Income Supplement (GIS) The Allowance and the Allowance for Survivor programs The federal government, in accordance with the Old Age Security Act, operates the OAS program. It is essentially a public assistance program, meaning that recipients of the benefits do not contribute directly to the cost of providing the benefits. Instead, society as a whole bears the responsibility for covering the costs, through federal income taxes. In this case, the pensions provided under the Old Age Security Act, including the Guaranteed Income Supplement and the Allowance, are funded directly out of the federal government's Consolidated Revenue Fund. Old Age Security is the basic federal government payment you receive when you are age 65 and older. While it can be a welcome addition to your retirement income, it certainly is not enough to be the sole source of retirement financing. This amount is indexed to inflation, so it rises every quarter to compensate for increases in the cost of living. OAS pension benefits are considered taxable income for the recipient. You must file an application with the Income Security Programs division of Human Resources and Social Development Canada in order to receive an OAS pension. If the application is made after you reach age 65, you can receive benefits retroactively from age 65 up to a period of one year. Eligibility To be eligible to receive an OAS pension, you must meet the following requirements: 65 years of age or over Canadian citizen or legal resident of Canada before applying if no longer living in Canada, must have been a Canadian citizen or a legal resident of Canada on the day preceding the day of departure from Canada minimum of 10 years of residence in Canada after reaching age 18 The amount of your pension is determined by how long you have lived in Canada. OAS is income-tested, which means that benefits are subject to a clawback if your income is greater than $66,733 (as of 2010). For every $100 of net income you earn over $66,733, you lose $15 of your OAS. At an income level of $108,090, no benefits are paid. For more information on OAS, including current and historical rates, click here to go to the Human Resources and Skills Development Canada (HRSDC) website. 4 2010 IFSE Institute

Guaranteed Income Supplement The Guaranteed Income Supplement (GIS) is available to low-income pensioners in addition to Old Age Security (OAS). The maximum monthly benefit you may receive as a single pensioner is $652.51 (as of January 2010). If you are married or in a common-law relationship and your partner is also eligible, he or she may receive up to a maximum payment of $430.90 (as of January 2010). As a GIS applicant, you are subject to an income test. Your benefit is reduced by $1 for every $2 of your base income (excluding OAS income) up to approximately $15,672 (as of January 2010). This includes CPP payments. For income above the yearly maximum, you do not qualify for GIS. Gillian is a single pensioner with an annual income of $14,000. She is entitled to the year's maximum GIS amount of $7,830 but then $7,000 is clawed back, calculated as (Gillian's income 2) or ($14,000 2). Most of her GIS benefit is clawed back as she approaches the year's income cut-off level of approximately $15,660, calculated as ($7,830 x 2), leaving her with $830 in yearly GIS benefit. These benefits are not taxable, but you must include them in your net income. In return, you are allowed an equivalent deduction. For more information on GIS, including current and historical rates, click here to view the Human Resources and Skills Development Canada (HRSDC) website. The Allowance The Allowance and the Allowance for Survivor program, intended for low-income seniors, can provide a monthly benefit to your spouse or common-law partner. To qualify for benefits, you must be receiving or be entitled to receive OAS and GIS and your spouse or common-law partner must be the following: between age 60 to 64 a Canadian citizen or a legal resident a resident of Canada for at least 10 years after reaching the age of 18 The maximum allowance is $947.86 a month. The allowance stops being paid at an income of $28,992 (as of January 2010). For your surviving spouse or common-law partner, the maximum allowance for survivor is $1,050.68 a month. It stops being paid at a maximum income of $21,120 (as of January 2010). These allowances are not combined, as an individual is either a spouse/common-law partner or a surviving spouse/common-law partner. These allowances are only payable until age 65, when standard OAS and GIS benefits replace them. The allowance for survivor ceases if the spouse/common-law partner remarries or lives in a common-law relationship for more than 12 months. These benefits are not taxable, but you must include them in your net income. In return, you are allowed an equivalent deduction. For more information on the Allowance, including current and historical rates, click here to view the Human Resources and Skills Development Canada (HRSDC) website. Exercise: Comparing Government Plans 2010 IFSE Institute 5

Lesson 2: Other Savings Plans Welcome to the Other Savings Plans lesson. In addition to government plans, many Canadians have retirement plans through their employers. In this lesson, you will learn about these employersponsored retirement plans. As many Canadians also need to save for their children's education, this lesson will provide an overview of registered education savings plans. It should take approximately 25 minutes to complete. At the end of this lesson, you will be able to do the following: describe defined benefit pension plans vs. defined contribution pension plans explain the role of pension adjustments describe DPSPs describe RESPs describe RDSPs describe TFSAs Employer-sponsored Registered Pension Plans Employer-sponsored registered pension plans generally provide the most generous benefits, but only about 40% of Canadian workers belong to these plans. There are two basic types of registered pension plans: defined benefit pension plans defined contribution plans Employers generally sponsor pension plans, although in some cases unions may sponsor them. Defined Benefit Pension Plans Defined benefit pension plans guarantee a specific amount of pension at retirement. This amount is usually calculated based on earnings and the number of years of service. How it works Defined benefit plans may be financed solely by your employer, or through contributions made by both you and your employer. Your contribution is generally calculated as a percentage of income, while the employer's contribution may vary from year to year. An employer's contribution may depend on a number of different factors, including the following: the investment returns earned by the pension in previous years how long employees stay with the company whether there are sufficient funds to finance the pensions under the plan Since the employer guarantees a defined benefit at retirement, the employer assumes the investment risk. Some plans may also provide pensioners with inflation protection. Calculating benefits The payments you receive when you retire may be calculated in a number of ways, depending on the type of plan you have: your average earnings over all the years you have worked for the company your earnings over the last three or five years of employment your earnings during your best five years a flat amount for each year of employment 6 2010 IFSE Institute

According to the Income Tax Act, the maximum yearly pension that can be provided through a defined-benefit plan and for which the contributions can be deducted for tax purposes by the employer and employee is the lesser of: a dollar limit of the maximum yearly pension x the number of years of pensionable service a percentage limit of 2.0% of earnings per year of service The dollar limit for defined benefit pension plans is 1 / 9 of the money purchase limit for the year. It is indexed annually to the increase in the average industrial wage as measured by Statistics Canada. Trista belongs to a defined-benefit pension plan with 2.0% per year of service. She currently earns $125,000 per year. This year, the money purchase limit is $22,000 and the defined benefit limit is $2,444.44. Trista's maximum benefit entitlement for the current year of service is $2,444.44, calculated as the lesser of ((the year's maximum dollar limit) and (earnings percentage limit)) or the lesser of ($2,444.44 and ($125,000 2%)). With a defined benefit pension plan, the yearly benefit entitlement is usually calculated based on the plan's benefit rate, years of service and a measure of earnings. The formula the plan uses is described in the employee's pension plan booklet. Aileen belongs to a defined-benefit pension plan with 1.5% per year of service. She currently earns $120,000 per year. This year, the money purchase limit is $ 22,450 and the legislated maximum yearly pension per years of service is $2,494.44. Under the Income Tax Act, Aileen's maximum possible yearly pension is $2,400, calculated as the lesser of (the maximum dollar limit) and (earnings x 2.0%) or the lesser of ($2,494.44 and ($120,000 x 2.0%). However, Aileen's plan provides for 1.5% x earnings per year of service, so her benefit entitlement for this year is $1,800, calculated as (earnings x plan's benefit rate per year of service) or ($120,000 x 1.5%). Benefits generally take the form of a life annuity, which is purchased by the plan when you retire. This annuity provides regular pension payments, and must also provide a benefit for your spouse of no less than 50% of your original benefits in the event of your death. Defined Contribution Plan Defined contribution pension plans are also known as money purchase plans. In a defined contribution pension plan, the employer guarantees the contributions they make to your plan but not your income at retirement. Defined contribution pension plans are generally riskier for employees than defined benefit plans because there is no guaranteed benefit when they retire. The pension depends on the following: performance of the investments in the fund over the life of the plan interest rates if the pension is converted to an annuity life expectancy of the pensioner if the pension is converted to an annuity How it works With this type of plan, the contribution is defined, not the benefits. The contribution is expressed as a percentage of your salary. 2010 IFSE Institute 7

The Income Tax Act sets the minimum contribution to the plan as 1% of your salary. The maximum contribution is either 18% of your income or the money purchase limit for the year, whichever is less. You typically contribute a percentage based on your salary, and then your employer matches the contribution. The money purchase limit is indexed annually to the increase in the average industrial wage as measured by Statistics Canada. Theo contributes 5% of his $55,000 salary to his employer's defined contribution pension plan. His employer matches this contribution. They both contribute $2,750 to the plan, calculated as ($55,000 x 5%) for a total of $5,500 for the year. This is well below the year s money purchase limit of $22,450. Other benefits of this plan include the following: Contributions to the plan are tax-deductible for both you and your employer. Any growth from investments is tax-sheltered. Money invested in a fund is administered by a professional money manager. As the employee, you accept the investment and inflation risk, because the amount of money in the plan depends on the talents of the money manager and the performance of the financial markets. An effective investment strategy results in higher benefits; a poor strategy may leave little for retirement. A defined contribution plan can make retirement planning difficult because you do not know what your level of benefits is until you retire. Exercise: Comparing Defined Benefit and Defined Contribution Plans Pension Adjustments What is a pension adjustment? If you participate in your employer's registered pension plan, your current RRSP contribution limit is reduced by a pension adjustment (PA). The pension adjustment reflects the amounts contributed by you and your employer to the pension plan in the previous year, as well as contributions made by your employer to a Deferred Profit Sharing Plan (DPSP). The pension adjustment calculation depends on whether you belong to a defined benefit or defined contribution pension plan. Past service pension adjustment (PSPA) Past service pension adjustments can further reduce RRSP contribution room. These are benefits an employer provides under a defined benefit pension plan for past service (in other words, when a company improves the benefits its employees receive when they retire). Employers usually provide employees with pension adjustment figures, or with a benefit entitlement figure that can be used to calculate the pension adjustment. Other Tax-deferred Investments In addition to RRSPs, pension funds, and other retirement investments, there are several other taxdeferred investments. Some are offered by mutual fund companies and other financial institutions. Those you may encounter most frequently are the following: deferred profit sharing plans (DPSP) 8 2010 IFSE Institute

registered education savings plans (RESP) registered disability savings plans (RDSP) tax-free savings accounts (TFSA) Deferred Profit Sharing Plan (DPSP) Deferred profit sharing plans (DPSP) are plans in which an employer sets aside a portion of its profits for the benefit of certain employees (beneficiaries), such as senior officers. Employees who own 10% or more of the common shares of the corporation are not allowed to participate in a DPSP. How it works Under a DPSP, a corporation makes a contribution to the plan on behalf of an employee. Any income earned in the plan grows untaxed, although funds withdrawn from a DPSP are taxable. Employees do not make contributions to DPSPs. Corporations may deduct their DPSP contributions, provided that they do not exceed 18% of the employee's salary or wages or the maximum contribution limit. These contributions are included in an employee's pension adjustment and will reduce his or her RRSP contribution room. The maximum contribution limit, as per the Income Tax Act, is one half the year s money purchase limit and is indexed annually to the increase in the average industrial wage as measured by Statistics Canada. Employers may make DPSP contributions during the year or within 120 days of the calendar year end or the employer's fiscal year end. DPSPs may hold the same investments as RRSPs. They may also hold debt and equity securities issued by the employer. Vesting DPSP amounts must vest with the beneficiaries immediately, once they have two years of participation in the plan. After contributions are vested, the employee then controls the funds and may even withdraw them from the plan. Similar to RRSPs, withdrawals are taxed in the hands of the employee and the plan trustee must withhold tax at the time of withdrawal. If the employee leaves the company, any non-vested contributions remain in the plan. These amounts, known as forfeitures, may be reallocated to other employees or returned to the employer, who must add them to company income in the year they are returned. Employees may transfer their vested contributions from the DPSP to the following without incurring tax: an RRSP a registered pension plan another DPSP an annuity a RRIF Withdrawal Options for a DPSP DPSP assets may be withdrawn in any of the following ways: as a lump sum in equal annual payments over a period of up to ten years as payments from a life annuity beginning before the beneficiary's 69th birthday and guaranteed for a period not longer than 15 years 2010 IFSE Institute 9

Special provision for shares of a corporate employer When an employee holds shares of the employer in a DPSP, the employee may choose to receive the shares directly, and elect to include in his or her taxable income the cost of the shares instead of the fair market value. In this case, the employee is allowed to make a special contribution up to the cost amount to his or her RRSP or RPP to offset the taxable income. This contribution must be made within 60 days from the end of the year. If the employee later sells the shares, he or she realizes a capital gain for tax purposes equal to the difference between the cost and the proceeds from the sale. Rudy was a member of his employer's DPSP. His employer contributed company shares worth $4,000 to his DPSP. The shares are now worth $8,000. If Rudy withdraws the shares from his DPSP, he would have to include $4,000 (his cost) in his taxable income. Rudy can make a special contribution of up to $4,000 to his RRSP and claim an offsetting deduction. If Rudy later sells the shares for $9,000, he would have to pay tax on a capital gain of $5,000, calculated as ($9,000 - $4,000). Exercise: DPSP Registered Education Savings Plans (RESP) Registered education savings plans (RESP) are attractive vehicles for parents, grandparents, and others interested in financing a child's post-secondary education. How it works As a subscriber, you contribute to an RESP for the benefit of your designated beneficiary(ies). You may contribute a lifetime maximum of $50,000 per beneficiary. Your contributions are not tax deductible. There is no yearly contribution limit. The federal government will then contribute an additional 20% on the first $2,500 of your annual contributions. This contribution is called the Canada Education Savings Grant (CESG). The government offers enhanced CESG payments on contributions made by families with net incomes below a certain threshold, indexed each year. If a family has a net income of half that amount or less, then the first $500 of RESP contributions made each year will trigger a CESG payment of 40% instead of 20%. If a family has a net income somewhere between the income threshold and half that amount, then the first $500 of RESP contributions made each year will trigger a CESG payment of 30%. If a family has a net income above the yearly threshold, the CESG payment is the usual 20% on the first $2,500 of RESP contribution. The most a beneficiary can receive in grants over the duration of the plan is $7,200. This is true even though there is the possibility for enhanced CESG payments in certain years if family income is below a certain level. Canada Learning Bond In an effort to encourage families to set up RESPs, the federal government also grants the Canada Learning Bond. It will provide $500 to children born on or after January 1, 2004 in families entitled to the National Child Benefit (NCB) supplement for the child, followed by up to 15 annual $100 entitlements for each year the family is entitled to the NCB supplement for the child, for a total of $2,000. To help cover the cost of opening an RESP for the child, HRSDC will pay an extra $25 with the first $500 bond. 10 2010 IFSE Institute

Withdrawing from an RESP Any income earned from RESP contributions grows tax-sheltered until the child attends a qualified post-secondary institution and begins withdrawing funds. When withdrawals begin, the student pays tax on the income and CESG portion at his or her marginal tax rate, which should be minimal. The original contributions are either returned to the subscriber or can be paid directly to the beneficiary. Neither payment will be subject to tax. The student may use the funds for any expenses related to his or her post-secondary education (such as tuition, books, accommodation, transportation, or computers). Types of RESPs There are two basic types of RESPs: scholarship plans self-directed RESPs For more information on RESPs, click here to link to the Canada Revenue Agency Web (CRA) site. For more information on the CESG, click here to link to the Human Resources and Skills Development Canada (HRSDC) website. Scholarship Plans Scholarship plans, also known as group or pooled plans, pool together capital from many subscribers. As a subscriber, you agree to make fixed contributions on a regular basis. The contributions are based on your child's age: the younger the child, the smaller the contribution. Payments are distributed only to those students who pursue a post-secondary education. To finance his or her first year, the child receives all your original contributions. For subsequent years, the child receives a scholarship each year based on the growth from your contributions, plus a share of forfeited earnings of those who drop out of the plan. Some disadvantages of scholarship plans are as follows: potential loss of earnings on contributions if a child does not enter a qualified post-secondary institution (however, capital is refunded to the subscriber) time constraints for the completion of post-secondary education eligibility for scholarships based on passing course requirements in succession limited transfer of benefits to other beneficiaries maximum startup age of 11 to 13, depending on the sponsoring organization loss of control on the type of investments; contributions are managed by the sponsoring organization Self-directed RESPs A self-directed RESP allows you, the subscriber, more flexibility and control with the plan. Some benefits include the following: flexible investment options, such as mutual funds, stocks, or bonds, may be held in the plan more than one beneficiary may be designated beneficiaries may be any age and may reside in Canada or any other country 2010 IFSE Institute 11

flexible contributions; they may be made any time of the year and in any amount up to the maximum limits more choice of qualifying post-secondary institutions you may request the return of your capital at any time without any tax consequences income may be shifted amongst the beneficiaries An RESP must be terminated on or before the last day of the 35th year following the year in which the plan was started, meaning by the end of its 36th calendar year. However, years in which contributions may be made are limited depending on the type of plan. In one type of self-directed RESP, the non-family plan, contributions may be made up to 32 years after the plan is opened. In another, the family plan, contributions may only be made up to the year in which the beneficiary turns 31 years of age. These limitations can cause problems if the beneficiary does not attend a post-secondary institution within that time frame or if there is an age gap between multiple beneficiaries. What happens when your beneficiaries do not pursue post-secondary education? If your beneficiaries do not pursue post-secondary education, your capital is returned to you without any tax implications and the CESG is returned to the federal government. In terms of the income, if your plan has been in place for at least 10 years, and the beneficiaries are at least 21, you may: withdraw it and pay tax at your marginal tax rate plus an additional 20% penalty tax (12% for residents of Québec) give it to a designated educational institution transfer it (up to a maximum of $50,000) to your RRSP or to your spouse's RRSP if you have the RRSP contribution room available Exercise: RESP Exercise: CESG Registered Disability Savings Plans (RDSPs) A registered disability savings plan (RDSP) is a savings plan that is intended to help parents and others save for the long-term security of a disabled person. The beneficiary of an RDSP must be eligible for the Disability Tax Credit and be under the age of 60. In order to be eligible for the Disability Tax Credit, a qualified practitioner must certify that the individual has a prolonged impairment. The RDSP is opened by the beneficiary who then becomes the plan holder. If the beneficiary is a minor (or an adult but not competent to enter into a contract), the RDSP may be opened on his or her behalf by certain other persons such as a legal parent or a guardian. Anyone can contribute to an RDSP with the written permission of the plan holder. Contributions may be made until the end of the year in which the beneficiary turns 59 years of age. Unlike for RESPs, contributors to an RDSP are not entitled to a refund of their contributions. Mr. Vulcan is aged 45 and disabled. He opens an RDSP. In order to help him in his old age, his foster mother Mrs. Thetis contributes $3,000 to the RDSP. This contribution is definitive. Even if Mrs. Thetis subsequently changes her mind, she cannot request a return of the contribution. 12 2010 IFSE Institute

Tax Treatment of RDSPs Contributors cannot deduct contributions to an RDSP from their taxable income. However, investment income earned within the plan is tax-deferred. The accumulated income is taxed in the hands of the beneficiary when paid out of the RDSP. Withdrawals of contributions by the beneficiary are not taxed because the contributions did not benefit from a tax deduction in the first place. RDSP contribution limits There is no annual limit on amounts that may be contributed to the RDSP of a beneficiary. However, there is a lifetime limit of $200,000 per beneficiary. Canada Disability Savings Grants The Canadian Government will pay matching grants of 300%, 200% or 100%, depending on the beneficiary's family income and the amount contributed. The grants are known as Canada Disability Savings Grants (CDSGs). Beneficiary s Family Income Less than or equal to $78,130* Greater than $78,130* Matching CDSG on RDSP Contribution On the first $500 $3 for every $1 contributed On the next $1,000 $2 for every $1 contributed On the first $1,000 $1 for every $1 contributed Maximum Payable CDSG $1,500 $2,000 $1,000 *The beneficiary s family income thresholds are indexed each year to inflation. The income thresholds shown are for 2010. (Source: www.hrsdc.gc.ca) An RDSP can receive a maximum of $3,500 in matching grants in one year, and up to $70,000 over the beneficiary's lifetime. A grant can be paid into an RDSP on contributions made to the beneficiary's RDSP by December 31 of the year in which the beneficiary reaches the age of 49. Continuing the previous example, since Mr. Vulcan is aged 45, Mrs. Thetis' contribution will attract a CDSG. Suppose Mr. Vulcan's family income is $50,000. The CDSG on Mrs. Thetis' contribution will be: On the first $500 1,500 On the next $1,000 2,000 On the remaining $1,500 nil Total CDSG (annual maximum) $3,500 It is apparent that, in order to maximize the amount of CDSGs, it would have been preferable for Mrs. Thetis to spread her contribution over two years. Canada disability savings bonds (CDSBs) The Canadian Government will pay income-tested Canada Disability Savings Bonds of up to $1,000 a year to low-income persons with disabilities, irrespective of the amount of contributions. The lifetime bond limit is $20,000. A bond can be paid into an RDSP until the year in which the beneficiary reaches the age of 49. 2010 IFSE Institute 13

Grants and bonds paid into a plan during the previous ten years become repayable to the Canadian Government in certain circumstances, such as the death of the beneficiary or the beneficiary ceasing to be disabled. Tax-free Savings Account The tax-free savings account (TFSA) provides a way to earn investment income tax-free. Other registered accounts allow the deferral of tax on income earned within the plan. The TFSA is unique in that the income is tax-free, i.e. it is never subject to tax. To be eligible for a TFSA, you must be at least 18 years old. In certain provinces, the age of majority is 19. As a practical matter, certain financial institutions may not allow a TFSA to be opened before the age of majority. Generally, the same types of investment may be held within a TFSA as within an RRSP, including mutual funds. For more information on TFSA, click here to link to the CRA website. TFSA Contributions Contributions to a TFSA are not deductible for income tax purposes nor are they taxable when withdrawn. TFSA contribution limits In the first year for TFSAs, 2009, the maximum contribution was $5,000. After 2009, the maximum annual contribution will be increased in line with inflation. The indexed amount will be rounded to the nearest $500. This means that from year-to-year, if the indexation is small, the maximum contribution amount may remain unchanged because it would be rounded down. In 2010, the amount of indexation was quite small, so when rounding to the nearest $500, it meant the maximum annual contribution for 2010 was still $5,000. If you do not contribute the maximum amount in a given year, this creates unused contribution room, which may be carried forward indefinitely. Withdrawals from TFSAs It is possible to withdraw money (contributions plus income) from a TFSA at any time. The amount withdrawn may be re-contributed but you would need to wait until January 1 of the following year to do so. Thus, the contribution room in any given year has three components: the maximum contribution for the current year, i.e. $5,000 plus indexation, if applicable any unused contribution room in the previous year withdrawals made from the TFSA in the previous year Mr. Diomedes does not contribute to his TFSA in 2009. In 2010, he contributes $5,000 on which he earns interest of $100. He withdraws the full $5,100 before the end of the year. 14 2010 IFSE Institute

In 2011, his contribution room is: In respect of 2011 5,000 In respect of the withdrawal in 2010 5,100 In respect of unused contribution room in 2009 5,000 Total $15,100 All withdrawals are totally tax-free. Exercise: RDSP and TFSA Lesson 3: Features of an RRSP Welcome to the Features of an RRSP lesson. This lesson defines the concept of an RRSP and covers some basic topics, such as the benefits of RRSPs, tax-sheltered growth inside RRSPs, and investments that qualify for RRSPs. This lesson takes 35 minutes to complete. At the end of this lesson, you will be able to do the following: describe the concept of an RRSP explain how to use an RRSP to defer taxes identify who can contribute to an RRSP identify when RRSP contributions can be made identify investments that are eligible for an RRSP compare the growth between investments held inside and outside an RRSP identify the factors that can affect the growth of assets inside an RRSP explain the advantages of RRSPs over registered pension plans (RPPs) Registered vs. Non-registered Savings Plans What is the difference between registered and non-registered savings plans? Registered savings plans are defined in the federal Income Tax Act and registered with Canada Revenue Agency (CRA). They allow you to save for your retirement without paying taxes on the contents until you withdraw the funds from the plan. However, there are some restrictions on the type of investments, the duration, and the amount you can contribute to registered plans as we will see in the rest of the lesson. Non-registered savings plans have no restrictions. You can save any amount and the plan can hold any kind of investment. However, you must pay tax on the plan's investment income as you earn it. Unlike RRSPs, there are no particular tax benefits associated with non-registered savings plans. What is an RRSP? RRSP stands for registered retirement savings plan. It is one of the registered savings plans set up under the Income Tax Act and registered with the Canada Revenue Agency. Legally, RRSPs are known as trusts or trustees because they hold assets on behalf of investors. 2010 IFSE Institute 15

RRSPs are designed to help you save for your retirement. They also provide two key benefits: an immediate reduction of taxable income you can deduct contributions to an RRSP from your total income tax-sheltered growth you do not pay taxes on contributions and earnings, so you have more to invest and your investments grow faster Why Save Outside an RRSP? If there are such strong benefits to investing inside an RRSP why would anyone invest outside an RRSP? While saving inside an RRSP has several advantages, there are two main reasons why investors save money outside an RRSP: there are no investment restrictions (only certain investments are eligible for RRSPs) there are no dollar restrictions (Canada Revenue Agency places limits on the amount of money an investor can contribute to an RRSP in any given year) Illustrating Tax-sheltered Growth Since income earned inside an RRSP is tax-sheltered, RRSP investments grow much faster than taxable investments held outside an RRSP. Because of compounding, the difference between holding an investment inside or outside an RRSP can be significant. This table shows the difference between the amounts accumulated inside and outside an RRSP for an investor who contributes $10,000 at the beginning of each year, earns 8% in interest per year and has a marginal tax rate of 40%. At the end of RRSP ($) Non-RRSP ($) 1 year 10,800 10,480 5 years 63,359 57,678 10 years 156,455 130,592 15 years 293,243 222,769 20 years 494,229 339,296 25 years 789,544 486,606 30 years 1,223,459 672,832 Since money within an RRSP is sheltered from tax until withdrawn, there is a greater amount to accumulate over time than there is if some of the growth is lost to tax. This is known as compound growth. Exercise: Comparing Registered and Non-registered Plans How Do RRSPs Help Save Taxes? RRSPs help save taxes in three ways: You can deduct the amount of your RRSP contributions from your total income for the year within certain limits to reduce your current tax liability. You can defer paying taxes on any investment income earned inside your RRSP until you withdraw it. You may reduce the total amount of taxes you pay on your income by paying some of it at a lower tax rate during retirement. 16 2010 IFSE Institute

RRSPs as Tax Deferral Plans Assume Dave earns $50,000 and has a marginal tax rate of 40%. His tax payable would be $20,000, calculated as ($50,000 x 0.40). Suppose Dave contributes $10,000 to an RRSP. Assuming he has no other deductions, his taxable income is now $40,000, calculated as (total income - contribution) or ($50,000 - $10,000) and his tax payable is $16,000, calculated as (net income x marginal tax rate) or ($40,000 x 0.40). In other words, by contributing to an RRSP, Dave saves $4,000 in income taxes, calculated as ($10,000 x 0.40). If the RRSP grows to $15,000, then the $5,000 gain, calculated as ($15,000 - $10,000) is taxsheltered as long as the funds remain in the RRSP. Suppose Dave withdraws the original $10,000 at retirement but his marginal tax rate is now 20%. His tax liability would be $2,000, calculated as ($10,000 x 0.20). By investing the $10,000 in an RRSP, Dave has: saved $4,000 in taxes at the time of the contribution tax sheltered $5,000 of investment growth reduced his total tax liability on the original contribution by $2,000 Who Can Contribute to an RRSP? Anyone who earns income, including minors, can contribute to an RRSP. However, you can only contribute to your own RRSP up to the end of the year you turn 71. You can contribute to a spousal RRSP as long as your spouse is 71 years old or younger. When Can You Contribute to an RRSP? You can contribute to an RRSP at any time of the year. However, you should consider the following two issues when making a contribution: tax-deductibility compound growth 2010 IFSE Institute 17

Timing of Contributions and Tax-deductibility If you want to deduct your contribution in the current taxation year, you must make the contribution within 60 days from the end of the year (by March 1 in most years, and by February 29 in leap years). For example, to deduct your contribution in the 2010 taxation year, you must make your contribution during the 2010 calendar year or during the first 60 days of 2011. If you make your contribution during the first 60 days of a year, you can choose the tax year to which it applies. In other words, if you contribute during the first 60 days of 2011, you can allocate the contribution either to the 2010 tax year or the 2011 tax year. You might choose the 2011 tax year if, for example, you have already made a contribution for the 2010 tax year. Timing of Contributions and Compound Growth Ideally, you should contribute as early as possible (January 1) to get the most benefit from compounding. For example, by investing $1,000 at the beginning of each year at 8% annually, you have a total of $15,645 by the end of the tenth year, as outlined in the attached graph. If you invest the same $1,000 at the end of each year, the total is approximately $14,487 at the end the tenth year, as outlined in the attached graph. In effect, you are a whole year ahead when you invest at the beginning of the year because you start earning interest sooner and there is a larger base for compounding. Qualified Investments The Income Tax Act restricts the types of investments allowed in RRSPs. Only certain investments qualify, as outlined in the following list: cash/near cash cash on deposit with Canadian financial institutions Canada Savings Bonds bankers' acceptances treasury bills bonds/debt obligations guaranteed investment certificates (GICs) and term deposits Canadian government (federal, provincial, municipal, and crown corporation) bonds bonds and debentures of corporations listed on a Canadian stock exchange debt obligations of foreign governments with an "investment grade" rating from a bond rating agency that rates foreign government debt Canadian mortgages (including a mortgage on your home) and mortgage-backed securities debt obligations of other foreign entities with an "investment grade" rating 18 2010 IFSE Institute

shares shares listed on a Canadian stock exchange shares on prescribed foreign stock exchanges shares or units in credit unions certain small business corporation shares other publicly listed securities (other than futures) traded on foreign stock exchanges, such as foreign-listed trusts, partnership units, and foreign-issued Canadian dollar bonds gold and silver bars mutual fund units royalty units from Canadian resource properties listed on a Canadian stock exchange rights, warrants, put options and covered call options traded on a Canadian stock exchange limited partnership units listed on a Canadian stock exchange life annuities with terms of less than 15 years and some life insurance policies Non-qualified Investments According to the Income Tax Act, other types of investments do not qualify for inclusion in RRSPs. Non-qualified investments include: other precious metals shares of private corporations where you own 10% or more of any class of shares commodity futures contracts listed personal property, such as works of art and antiques gems and other precious stones real estate Contributions in Kind Contributions to a self-directed RRSP may take the form of cash or other assets - called contributions in kind - such as stocks, bonds, or mutual funds. If you contribute assets other than cash, you must transfer the asset to the trustee, or holder, of the RRSP. The trustee then gives you a receipt for an amount equal to the asset's fair market value (FMV) and the asset becomes an investment of the plan. For tax purposes, the FMV is the value of the contribution. If the asset has increased in value since you purchased it, you must report the capital gain when you transfer it to your RRSP. However, if there is a capital loss on the transfer, it is not deductible because the Income Tax Act considers the loss to be zero. Sunny owned 1,000 units of Mega Growth Fund acquired at $9 per unit. Her adjusted cost base (ACB) is $9,000 calculated as (1000 x $9). The units had a net asset value per share (NAVPS) of $10 on February 28, this year. Sunny transferred the fund units to her self-directed RRSP for the previous taxation year on February 28, this year. The FMV of Sunny's February 28 RRSP contribution is $10,000, calculated as (number of units x NAVPS) or (1,000 x $10). She realizes a capital gain of $1,000, calculated as (FMV - ACB) or 2010 IFSE Institute 19

($10,000 - $9,000), and reports a taxable capital gain of $500 on her tax return, calculated as (capital gain x capital gains inclusion rate) or ($1,000 x.50). Exercise: Reviewing RRSPs Growth of RRSP Assets As discussed earlier in the lesson, assets can grow quickly inside an RRSP; however, the actual value of your RRSP depends on several factors: amount of money you contribute each year number of years you make contributions rates of return earned by RRSP investments Suppose you contribute $10,000 to an RRSP at the beginning of each year and earn an average rate of return of 8%. The value of your RRSP will reach $156,455 at the end of ten years. Contributing different amounts to an RRSP If you contribute $12,000 each year instead of $10,000 and earn 8%, your RRSP will be worth $187,746 at the end of ten years. Contributing to an RRSP for different amounts of time If you begin contributing ten years earlier, for a total contribution period of 20 years, the value of your RRSP will grow to $494,229. Earning different rates of return in your RRSP If you earn 10% on your investments instead of 8%, your RRSP will then be worth $175,311 after ten years. Comparing RRSPs to RPPs Current tax rules make RRSPs more flexible than other retirement savings vehicles, such as registered pension plans (RPPs). As illustrated in the following table, most pension plans restrict access to their funds until retirement, while RRSPs allow investors to withdraw funds at any time. 20 2010 IFSE Institute

RPP Investor and/or employer make prescribed contributions Employee's contributions are deductible from the taxpayer's total income for the year Investment income earned on the funds is not taxable while it is held in the plan Investor cannot access the funds until retirement in most cases Funds must be used to provide a stream of retirement income which is taxable RRSP Investor has complete discretion over contributions Total contributions are deductible from the taxpayer's total income for the year Investment income earned on the funds is not taxable while it is held in the plan Investor is free to withdraw funds at any time with no restrictions No maximum on withdrawals but are subject to tax at the person s marginal tax rate in the year they are withdrawn Lesson 4: Types of RRSPs Welcome to the Types of RRSPs lesson. This lesson describes the different kinds of RRSPs and when they might be most appropriate. You will learn about basic or regular RRSPs, self-directed RRSPs, group RRSPs, and spousal RRSPs. This lesson takes 30 minutes to complete. At the end of this lesson, you will be able to do the following: list the main characteristics of basic, self-directed, group, and spousal RRSPs outline the main advantages and disadvantages of group RRSPs demonstrate how to use spousal RRSPs for income-splitting explain the advantages of contributing to a spousal RRSP explain the tax implications of withdrawals from a spousal RRSP describe LRSPs and LIRAs Basic and Self-directed RRSPs All RRSPs can be categorized as either basic or self-directed. Basic RRSPs Basic RRSPs (also called regular RRSPs) are the most common RRSPs. They typically hold a single type of investment, such as guaranteed investment certificates (GICs), Canada Savings Bonds (CSBs), or mutual funds. Basic RRSPs are usually held and managed by a trustee, often a trust company or bank, and are therefore called managed accounts. Typically, a portfolio manager determines the types of investment offerings (for example, GIC, CSB, or mutual funds) that are available to investors in a managed account. Investors then choose among these options. Self-directed RRSPs The investor manages the investments in a self-directed RRSP and assumes all responsibility for investment performance. However, there is still a trustee (sometimes called the plan carrier), a trust company, bank, investment company, or broker that holds and administers the plan. 2010 IFSE Institute 21

Typically, the trustee charges a non tax-deductible fee for this service. Investors can hold a much wider variety of investments in a self-directed plan than in a basic plan. Some examples include the following: common and preferred shares of public corporations government and corporate bonds mortgages (including the mortgage on the investor's home) mutual funds Canada Savings Bonds Some self-directed RRSPs are variations of a brokerage account and only allow you to trade securities handled by that brokerage firm. Other self-directed accounts are run by trust companies that allow you to hold any investments that are eligible for RRSPs. Exercise: Comparing Basic and Self-directed RRSPs Group RRSPs Group RRSPs are a collection of individual RRSPs (basic or self-directed) grouped together for administrative purposes. Typically sponsored by an employer, union, or professional association, group RRSPs are managed by a financial institution, securities dealer, or insurance company on behalf of a specific group, usually employees. For example, a corporation may offer an RRSP from a specific mutual fund company or financial institution. This table summarizes the advantages and disadvantages of group RRSPs: Advantages You can receive immediate tax savings by making your contributions through payroll. You can transfer your group RRSP to another RRSP when you leave the company. It is less costly and time-consuming for the employer to administer than traditional pension plans. The employer may contribute to the plan. Contributions and withdrawals may be made at any time unless restricted by the employer. Disadvantages The employer chooses the plan provider, not you. The plan may offer limited investment options (for a basic RRSP). The employer may restrict withdrawal amounts during your employment. Immediate Tax Advantages of Group RRSPs Let's look at how you can receive an immediate tax advantage from contributing to an RRSP through payroll deductions. Tom and Jerry both have a marginal tax rate of 40%. Beginning in January, Tom contributes $1,000 each month to his RRSP through a pre-authorized chequing account (PAC) while Jerry contributes $1,000 a month to a group RRSP. At the end of the tax year, Tom reports a $12,000 RRSP contribution (12 x $1,000) on his tax return. Based on his marginal tax rate of 40%, he gets a $4,800 refund, calculated as ($12,000 x 0.40), assuming no other deductions or taxes payable. But he has to wait to receive the refund until after he submits his income tax return. Jerry's situation is different. Each month he contributes $1,000 to his group RRSP through payroll deductions. Based on his marginal tax rate of 40%, his employer withholds $400 less tax each month from his pay, calculated as ($1,000 x 0.40). At the end of the year, Jerry has saved $4,800 in taxes, calculated as (12 x $400). 22 2010 IFSE Institute

Both Tom and Jerry save $4,800 in taxes, but Jerry receives his tax savings throughout the year while Tom has to wait until after submitting his tax return to receive his tax savings. The difference is timing. Exercise: Types of RRSPs Spousal RRSPs Spousal RRSPs are plans where the planholder's spouse or common-law partner is the contributor. Couples set up spousal RRSPs to split their income at retirement and minimize their income tax liability when money is withdrawn from the plans. If you have RRSP contribution room, you can elect to contribute either to your own RRSP or to a spousal RRSP where your spouse or common-law partner is the annuitant. If you contribute to a spousal RRSP, you deduct the amount from your income for tax purposes. Your spouse's or common-law partner's contribution room and taxes are not affected. If your spouse or common-law partner has RRSP contribution room, he or she can also contribute to a personal RRSP, up to his or her maximum contribution limit and deduct it from income for tax purposes. Based on his earned income from last year, Jon can contribute $13,800 to an RRSP this year. His common-law partner, Kris, worked only a few months last year after suffering an injury early in the year, so his maximum contribution is only $4,000. Kris contributes the full $4,000 to his own RRSP. Jon decides to split his contribution between his own RRSP and a spousal RRSP for Kris. He puts $5,500 into Kris' spousal RRSP and $8,300 into his own plan. For tax purposes, Kris deducts $4,000 from his income while Jon deducts $13,800 from his income. Spousal RRSPs are like other RRSPs. They can take the form of a basic or a self-directed RRSP and can hold various kinds of investments depending on the type of RRSP. Note: While the contributor can be any age, the annuitant must be 71 years old or younger. Tax Benefits of Contributing to a Spousal RRSP Spousal RRSPs allow you to save taxes by income-splitting with your spouse or common-law partner. They are particularly beneficial if one spouse (or common-law partner) expects to have a higher income than the other at retirement, for example, from pensions and other sources. The idea is to build two pools of savings that will produce two similar income streams during retirement. Under Canada's progressive tax system, you and your spouse or common-law partner would likely pay less tax on the two streams of income than if all the retirement income were taxed in hands of the higher income earner. Note: An executor of an estate may make a spousal contribution on behalf of the deceased in the year of death in order to decrease the estate's tax liability. 2010 IFSE Institute 23

How Income-splitting Saves Taxes Let's look at an example of how income-splitting helps lower taxes during retirement. Russell accumulates $200,000 in his RRSP. Assume the marginal tax rate on $200,000 is 40%. If Russell withdraws the whole amount in a lump sum, the tax would be $80,000, calculated as ($200,000 x 0.40). Suppose, instead, that Russell contributes to a spousal RRSP in his wife, Alma's name, as well as to his own RRSP. Each accumulates $100,000. Assume the marginal tax rate on $100,000 is 35%. If Russell and Alma both withdraw $100,000 from their respective RRSPs, the tax would be $70,000, calculated as ($100,000 x 0.35 x 2). By income-splitting, Russell and Alma still withdraw a total of $200,000 but they save $10,000 in tax, calculated as ($80,000 - $70,000). Maximizing the Benefits of Income-splitting When you split income, you attempt to build two pools of savings and therefore eventually two retirement income streams that are similar. The greater the difference between the two streams, the less tax savings. For their retirement Trina and Jerome want to receive a lump sum of $100,000 before taxes from their RRSPs. How should they do it? For simplicity, consider only federal tax based on the following tax brackets: Level of Taxable Income Federal Tax Rate up to $37,178 15.5% $37,179 to $74,357 22% $74,358 to $120,887 26% more than $120,887 29% Trina's Jerome's withdrawal ($) withdrawal ($) Total tax ($) 100,000 0 20,609 1 70,000 30,000 17,633 2 50,000 50,000 17,167 3 1. ($37,178 x 15.5%) + ($37,178 x 22%) + ($25,643 x 26%) 2. ($37,178 x 15.5%) + ($32,822 x 22%) + ($30,000 x 15.5%) 3. [($37,178 x 15.5%) + ($12,822 x 22%) x 2] Therefore, Trina and Jerome can save the most taxes by income splitting and withdrawing equal amounts. More than One Spousal RRSP The Income Tax Act allows you to hold more than one spousal plan at a time. However, if you have more than one spousal plan in place, Canada Revenue Agency (CRA) views them collectively for attribution purposes. Suppose Robert contributes to two separate spousal plans on behalf of his wife Jane: Plan A and Plan B. In the eyes of CRA, Jane's spousal RRSP consists of both Plan A and Plan B. When there are withdrawals, CRA looks at who contributed to Jane's spousal plans and when, regardless of whether it is Plan A or Plan B, to determine who pays the tax. 24 2010 IFSE Institute

RRSP Attribution Rule CRA has special attribution rules regarding withdrawals from spousal RRSPs. If your spouse or common-law partner makes a withdrawal from a spousal plan in the year in which you contribute to that spousal plan, or in the following two calendar years, the withdrawal is taxed in your hands (the contributor). After that time period, any withdrawals are taxed in the hands of your spouse or common-law partner (the annuitant). Harvey contributed the following amounts to his wife Patti's spousal RRSP: Year Spousal Contribution (by Harvey) 2010 $2,000 2009 $2,000 2008 $2,500 2007 $1,500 In 2011, Patti decides to withdraw $8,000 from her spousal RRSP. Who pays the taxes? Based on the RRSP attribution rule, Harvey would pay tax on $4,000 ($2,000 from his 2010 contribution and $2,000 from his 2009 contribution) at his marginal tax rate. Patti would pay tax on the remaining $4,000, calculated as ($8,000 - $4,000) at her marginal tax rate. Locked-in RRSPs (LRSP) and Locked-in Retirement Accounts (LIRA) Locked-in RRSPs (LRSP) and Locked-in retirement accounts (LIRA) provide an alternative investment vehicle to employees who leave a company that has a pension plan. They are essentially RRSPs, which are governed by the applicable federal or provincial pension legislation. If you leave your employer, you may be able to transfer your pension benefits to an LRSP or LIRA. Similar to an RRSP, you control the investment decisions. However, you cannot make any contributions to these plans and the pension legislation restricts the withdrawal of funds. Generally, you may not mature your LRSP or LIRA until you are within ten years of the normal retirement age. As well, you may not cash in your plan and withdraw it as a lump sum. You may convert your LRSP or LIRA to a life income fund (LIF) or locked-in retirement income fund (LRIF) to provide you with a life income. One benefit of locked-in accounts is the credit proofing provided by these plans. Although LIRAs were introduced to replace LRSPs, LRSPs are still available in British Columbia, Nova Scotia, and federal jurisdictions. Exercise: Spousal RRSPs and Locked-in Plans 2010 IFSE Institute 25

Lesson 5: RRSP Contribution Limits Welcome to the RRSP Contribution Limits lesson. This lesson outlines what the RRSP contribution limits are, presents examples, and shows you how to calculate contribution room under different conditions. It also discusses the rules regarding unused RRSP contribution room, excess contributions, and the tax deductibility of RRSP contributions in future years. This lesson takes 25 minutes to complete. At the end of this lesson, you will be able to do the following: define and calculate RRSP contribution room list the current Income Tax Act contribution limits explain the carry-forward of unused RRSP contribution room define and calculate earned income explain how RRSP contributions can reduce taxes in future years determine the consequences of over-contributing to an RRSP How Much Can You Contribute to an RRSP? Total contribution room is the amount you are allowed to contribute to your RRSP. Your total contribution room is 18% of your previous year's earned income up to the maximum contribution limit, adjusted for carry-forward contribution room and pension-related items, as outlined below: Click here for more information from the Canada Revenue Agency (CRA) Web site. Calculating Income Before you can calculate your RRSP contribution room, you first need to determine your earned income. Earned income generally includes net income from employment, business, and rental property, but does not include investment income (with the exception of net rental income from property). This table shows the different components of earned income. Employment Income Includes *net employment income (before deductions for registered pension plans, CPP/QPP and EI) including overtime and bonuses Earned Income investment income Excludes *self-employment income Business Income taxable capital gains *income from a Canadian business (even if working as a non-resident) 26 2010 IFSE Institute