RRSPs

The primary tax shelter available to most people is Registered Retirement Savings Plans ("RRSP's"). The basic concept is to defer income tax on current earnings until after you have retired. At that time withdrawals from the RRSP are taxed.

After many years of a constant limit of $13,500 the RRSP limit is changing as follows:

2003 - $14,500
2004 - $15,500
2005 - $16,500
2006 - $18,000
2007 - Indexed increases based on average Canadian wage growth

Contributions to an RRSP are limited to the lesser of the annual limit or 18% of the previous year's "earned income." Earned income for RRSP purposes includes such items as employment income (net of union dues and employment expenses), self-employment income (losses), rental income, alimony and a few other forms of income. If you do not make all your eligible contributions in a year, that contribution room carries forward to future tax years. Note that earned income does not include most forms of pension income, interest, dividend or capital gains income.

If you are a member of a Registered Pension Plan ("RPP") through your employer, your RRSP contribution limit is reduced by the Pension Adjustment ("PA") shown on your T4 or T4A issued by your employer.

By way of example, suppose a person earns $40,000, contributes $2,000 to their RPP, their T4 shows a PA of $4,000 and they pay $500 in union dues. Assuming no other forms of income or deductions, their taxable income for that year would be $37,500 ($40,000 - $2,000 - $500). The RRSP contribution limit for the following year would be $3,110 (($40,000 - $500) x 18% - $4,000).

The contribution limit would be $7,110 for an individual with no RPP.

Your tax savings from an RRSP contribution depend on the marginal tax rate effective at the time.

Income in the RRSP grows tax-free. At age 69, sooner if you prefer, you must collapse the RRSP into one of the prescribed forms of retirement income plans. The size of your RRSP on conversion and the type of retirement income plan selected will be factors in determining the level of annual retirement income.