Tax-Free Savings Accounts (TFSA) - Don’t wait for retirement

A Tax-Free Savings Account (TFSA) is a flexible investment account that you can use to meet short and long-term goals. Assets held inside a TFSA can earn interest, dividends or capital gains, but this income is not taxed, even when amounts are withdrawn from the TFSA, unlike a Registered Retirement Savings Plan (RRSP). Therefore, a TFSA can be used for both retirement and pre-retirement goals.

Registered Retirement Income Fund (RRIF) - Is it time to convert your savings?

Since your Registered Retirement Savings Plan (RRSP) matures on December 31st of the year you turn 71, you will likely convert it to a Registered Retirement Income Fund (RRIF). A RRIF is funded by rolling your RRSP funds into the RRIF on a tax-deferred basis. You can then use the funds in your RRIF as an income source for retirement. You can see a RRIF as an extension of your RRSP. As with your RRSP, you can continue to manage the investments in your RRIF. Like an RRSP, the growth of investments held within a RRIF is tax-deferred.

Registered Retirement Savings Plan (RRSP) - A pillar of retirement income planning

This blog submission is provided by our friends from the Sonoda Team at TD Wealth to help with your retirement and estate planning education.


What is an RRSP? When and how much can you contribute to your RRSP?

One of the pillars of retirement income planning in Canada is the Registered Retirement Savings Plan (RRSP). Introduced by the federal government as an alternative retirement saving vehicle for Canadians who did not have the benefit of an employer-sponsored pension plan, RRSPs have become a mainstay of saving for retirement.

RRSPs enable effective savings for two main reasons:

  1. Contributions to a plan are not taxed until they are withdrawn, which reduces your present taxable-income.
  2. Investment income or capital gains arising from any investments held inside your RRSP grow on a tax-deferred basis until you withdraw them, or until the plan is de-registered.

You can contribute to your RRSP up to and during the year you turn 71 and you can make contributions at any time during the calendar year.

By the end of the year you turn 71, you are required to close your RRSP by either withdrawing the funds; transferring the funds to a Registered Retirement Income Fund (RRIF); or using the funds to buy an annuity. One of these choices must be made by December 31st of that year.

There is a limit on the amount that you can contribute annually to your RRSP. The annual limit is known as the RRSP deduction limit—or, more commonly, your RRSP contribution room.

    The amount you can contribute each year depends on:

    • Your earned income from the previous year
    • The maximum contribution limit set annually by the federal Income Tax Act (ITA)
    • Any unused contribution room from previous years (which can be carried forward indefinitely)
    • Any adjustments based on employer pension plan contributions or spousal RRSPs

      What income counts toward your RRSP contribution room?

      RRSP contribution room is based on certain types of earned income as defined in the federal ITA, including:

      • Employment income
      • Net rental income
      • Net business income
      • CPP/QPP disability pension income
      • Spousal/child support received
      • Research grants

      Earned income does not include:

      • RRSP/RRIF income
      • Interest and Dividend Income
      • Capital gains
      • CPP/QPP income, other than disability benefits
      • Old Age Security
      • Workers’ Compensation

      How does your earned income and the ITA affect this year’s RRSP contribution room?

      You can contribute 18% of your previous year’s earned income up to an annual allowable maximum, which changes every year as set by the ITA. Quite simply, if you have worked and created contribution room, you can contribute.

      The quickest way to find out the amount you can contribute is to refer to the RRSP deduction limit on your Notice of Assessment (or Reassessment) from the Canada Revenue Agency (CRA), which you receive after filing your tax return, either in the mail or in your CRA online account:

      Your Notice of Assessment will show the contribution limit for the present tax year, as well as any contributions you made but haven’t deducted in previous years.

      The federal ITA also influences your contribution room through its rules to prohibit tax avoidance. For RRSPs, the Anti-avoidance Rules will enable the CRA to impose tax if investments made within them are not qualified. Qualified investments include money, guaranteed investment certificates, government and corporate bonds, mutual funds and securities listed on a designated stock exchange.

      How does your unused contribution room from previous years affect this year’s RRSP contribution room?

      Perhaps you made a contribution but didn’t have enough room to deduct it in a past year. You can carry forward the contribution room you build up and deduct any undeducted contributions then.

      You are allowed to make a cumulative over-contribution of $2,000 above your annual contribution room without incurring a penalty from the CRA. That $2,000 over-contribution may be made in one tax year, or over a number of tax years. Note, however, that you cannot deduct that extra $2,000.

      By contrast, if you contribute more than this year’s amount, including making up for your unused contribution room, you will be in an over-contribution position. The CRA may then impose a penalty of 1% per month on the excess amount, until you withdraw it. You will not be taxed on the withdrawal if you make it during the year the unused contribution was made, or the year following, provided that you reasonably expected you could fully deduct the excess.

      Alternately, you can leave the excess contribution in your RRSP if you know you will be generating sufficient new contribution room in the following year. However, in the meantime you will still pay the monthly penalty for an excess contribution.


      How do adjustments based on employer contributions affect this year’s RRSP contribution room?

      The amount you can contribute in a given year will be affected by any pension adjustments or past service pension adjustments you may have.

      The amount of pension benefits you earn in a year from an employer pension plan will comprise your pension adjustment, which reduces your RRSP deduction limit for the following tax year. The greater the amount put aside for you in your employer pension plan, the less you will be able to contribute to your RRSP. This reduction occurs because, if you benefit from an employer pension plan or deferred profit sharing plan, you are seen to be receiving benefits similar to an RRSP. Following from the original intent behind creating RRSPs, this limitation is designed to level the retirement savings playing field.

      Meanwhile, if you receive additional pension benefits because your employer has upgraded the company pension plan on a retroactive basis, or you have purchased pension credit for past service, that will result in a past service pension adjustment (PSPA). It will also reduce your RRSP contribution room.

      The impact of an employer pension plan enhancement may sometimes be sufficient to reduce that year’s contribution limit, and any unused carry-forward room. You will have “negative contribution room”, which will not be decreased until you generate earned income and new contribution room.

      If you leave your employment before retirement, you may be entitled to a pension adjustment reversal (PAR), which will restore some of the RRSP contribution room that was lost due to pension adjustments. In that case, the amount of the PAR would be calculated by your pension administrator. It will differ depending on whether your employer plan was a defined benefit (DB) or defined contribution (DC) plan. DC plans involve contributions from the employee, and are viewed by the CRA to be similar to an RRSP. DB plans, on the other hand, generally involve contributions from the employer as well. Therefore, they are viewed as providing an added benefit on top of an RRSP. If you had a DB plan, you will only get a PAR if you give up the right to receive payments from the plan, or if the commuted value of benefits earned under the plan to a locked-in RRSP (generally known as a Locked-in Retirement Account) are less the amounts considered to be a pension adjustment or PSPA.

      You may be able to buy back benefits from your employer pension for a time period when you were not participating in your employer pension plan, perhaps due to a leave of absence such as maternity leave.

      Funding a buyback can be done as:

      • A lump sum payment
      • Installments
      • Direct transfer from a registered plan such as your RRSP

      If you, as an individual (rather as part of a group), decide to undertake a buyback, please note that the CRA must certify the PSPA calculated by the employer or pension administrator. It is the employer or pension administrator’s responsibility to submit a buyback for certification.

      A PSPA cannot be certified if it creates more than $8,000 of negative RRSP contribution room. If so, you will have to weigh the value of the future income generated by adding to your employer pension plan versus the income that could be generated by the funds you transfer from your RRSP.

      Let's look at an example:

        In this scenario, Sam decides to buyback $30,000 in past service. It will result in a PSPA of $30,000. If she is funding the buyback by transferring $15,000 from her RRSP, this creates $15,000 negative contribution room (more than the allowable maximum of $8,000), so she will be required to make further RRSP withdrawal of $7,000 to fund the buyback.

      PSPA of $30,000 - RRSP transfer of $15,000 = PSPA reduced to $15,000

      Allowable negative RRSP room of $8,000 = Requires an RRSP withdrawal of $7,000

      A pension buyback and its impact on your RRSP involve some tricky calculations, possibly a transfer from your RRSP to fund the buyback, and a withdrawal so you won’t end up penalized by the CRA. Review your buyback plan with your TD advisor to ensure you will benefit from doing it in the first place. If you will benefit, your advisor can assist with facilitating the buyback, and if necessary a withdrawal from your RRSP.

      How do spousal RRSPs affect each spouse’s contribution room?

      A spousal RRSP can be set up by one spouse or common-law partner for the other. Generally, it is established by the higher income-earner for the lower income-earner. Some couples have both individual and spousal RRSPs. Some individuals eventually combine both types of their RRSPs into one spousal RRSP to make managing their investments easier or to cut down on administration costs.

      Let's look at an example:

        If Rahim sets up a spousal RRSP for Kala, when he contributes to the spousal RRSP, his own contribution room will be decreased. He may deduct a contribution based on his contribution room, even though Kala is the annuitant and has full control of the plan. When income is withdrawn from the plan, it will taxable to Kala. The exception would be if she makes a withdrawal within three years from when Rahim makes a contribution. The attribution rules in the federal ITA will be applicable and Rahim will be taxed on the withdrawal.

      The attribution will apply on withdrawals up to the total amount of contributions made to all spousal RRSPs in the same year as the withdrawal, and the two previous years. The attribution rule will not apply if the partners are not living together due to relationship breakdown or the annuitant’s partner has died.

      While the contributions made to a spousal RRSP are based on the contributor’s contribution room, ultimately, a spousal RRSP will enable the couple to split income when withdrawals are eventually made.

      Possible Spousal RRSP Issues: Dominic and Fabriana

      • When Dominic turns 71, his spouse Fabriana is 63. He can still contribute to her spousal RRSP, while collapsing his individual RRSP, as long as he has contribution room.
      • If Dominic and Fabriana separate, under certain conditions, they could ask the CRA to remove the spousal designation of any spousal RRSPs, if they provide written proof that their marriage has broken down (e.g., a legal separation agreement or divorce order).
      • If they get divorced, a tax-free transfer of RRSP funds can be made from one spouse to the other as part of the legal proceedings to settle the division of property or fund spousal support.

      Is a spousal RRSP right for you and your partner? Talk it over with your partner and TD advisor to ensure you know the benefits and rules.

        What taxes are imposed on RRSP withdrawals?

        If, at any time, you withdraw funds from your RRSP, a federal withholding tax will be imposed (except in special cases such as the RSP Home Buyers’ Plan or Lifelong Learning Plan). If you live in Quebec a combined federal/provincial withholding tax will be imposed.

        When can you claim RRSP contributions?

        When making tax claims on RRSP contributions, you can claim contributions made in the first 60 days of the later calendar year for either the preceding tax year or the present tax year. For example, Audley didn’t make an RRSP contribution before the end of 2015, but he needed the tax deduction for the 2015 tax year. Therefore, he decided to make a large contribution to his RRSP in early January, and use it to claim a deduction on his 2015 tax return. Alternately, he could have claimed a deduction for the contribution on his 2016 tax return, or any future tax year.

        How is your RRSP taxed when you die?

        It’s likely that your RRSP will present the largest tax liability for your estate. It will be included as income on your terminal tax return at fair market value. Tax will be payable unless you undertake one of a few strategies prior to death.

        The most common strategy is to name a qualified beneficiary for your RRSP. That includes your spouse or common-law partner, a dependent minor child or grandchild. The usual practice is to choose your partner. Please note that Quebec residents must name beneficiaries in their will—they cannot do so in registered plan documents.

        The RRSP funds are transferred to that person as a refund of premium. The full amount could be taxed as your partner’s income. Usually, however, your partner would transfer the funds into an RRSP or RRIF, continuing the deferral of tax until the funds are withdrawn, or passed on again when he or she dies.

        If the beneficiary is a dependent child or grandchild and is named your beneficiary, the funds could be used to purchase an annuity. The only caveat imposed by the CRA is that annuity must end by the time the child or grandchild turns 18 years of age. This results in spreading the tax over several years, when the annual income from the annuity is received, allowing the child or grandchild to take advantage of personal tax credits to lower his or her tax bill. If the child or grandchild (youth or adult) has a physical or mental disability, your RRSP funds can be transferred to the child’s RRSP, RDSP, RRIF, or Pooled Registered Pension Plan, or can be used for the purchase of an annuity.

        If you name a registered charity as your beneficiary, your estate will be entitled to a charitable tax donation credit. It is likely to offset any tax owing upon deregistration of your RRSP at the time of death.

        If you name neither a charity, nor a qualified beneficiary (such as a partner, child or grandchild), your estate will be responsible for paying the tax owed upon the collapse of the plan. If there are insufficient funds in your estate, the beneficiary may have to pay a share of the taxes owing in situations when the estate and beneficiary share responsibility for the tax liability.

        Talk to your TD advisor about a possible beneficiary for your RRSP. Make sure you know the tax impact of your choice.

        This post has outlined some of the ways that RRSPs can help you prepare for retirement, and some of the challenges that they can cause. Be sure to contact your advisor with your questions.


        The information contained herein has been provided by TD Wealth and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. TD Wealth represents the products and services offered by TD Waterhouse Canada Inc. (Member – Canadian Investor Protection Fund), TD Waterhouse Private Investment Counsel Inc., TD Wealth Private Banking (offered by The Toronto-Dominion Bank) and TD Wealth Private Trust (offered by The Canada Trust Company).
        ®The TD logo and other trade-marks are the property of The Toronto-Dominion Bank.

        Retirement is coming - Will you have enough?

        This blog submission is being provided by our friends from the Sonoda Team at TD Wealth to help WITH your retirement and estate planning education.


        For years you’ve been saving for retirement. How much do you think you will actually NEED to spend? Will you have enough? Do you have a withdrawal strategy, with options, should you face unforeseen challenges or decide to reset your goals?

        There are plenty of recommendations to make your retirement income last longer. One popular withdrawal rule of thumb is to withdraw 4% per year. However, does that figure have any connection to you and your retirement? Estimating how much you will need during retirement will involve a blend of personal reflection and number-crunching.

        If you’re between ten to five years away from retirement, now more than ever is the time to sit down with your TD advisor and do some solid planning. This is when you need to work closely to estimate your spending and withdrawal patterns over the span of your retirement.

        You’ll need to shift from asset accumulation to asset utilization. You’ll need to construct a flexible, tax-efficient cash flow to pay your fixed expenses, and have a solid sense of your ability to afford discretionary spending.

        While putting together your plan, you should consider planning for unexpected events, for example, a diagnosis of a long term illness. This, plus economic and market factors could have an impact on your ability to withdraw from your retirement income sources.

        There are 4 key steps to consider when developing a retirement and estate planning strategy:

        • Ask questions to develop specific goals
        • Identify retirement income sources
        • Plan for different spending stages
        • Establish a withdrawl strategy

          Key questions

          Establishing whether you will have enough, and what you may need to do to ensure security in retirement starts with asking some key questions about your retirement goals. Here are some questions to work through with your TD advisor:

          • When do I want to retire?
          • What are my retirement income sources (government benefits, pensions, registered and non-registered investments)?
          • Will I have debts when I retire?
          • Will I have sufficient health insurance coverage?
          • Will I sell my home because I may not be able to maintain it, or will I need the sale proceeds to fund my retirement?
          • Will I be leaving a legacy for my children/grandchildren?
          • Will I be leaving a gift for charity?

          The next step is review your retirement cash flow. Will your retirement income meet your retirement goals? Dive into your financial files for the following information and speak with your TD advisor:
          First, establish what your fixed expenses are likely to cost. This includes housing costs (such as property tax, maintenance, utilities and insurance premiums), food, clothing and transportation.
          Second, what type of discretionary spending will you engage in? Will you be travelling more during retirement? Will you throw your energy into a hobby that may involve expenses? What about entertainment?

          Retirement Income: Sources and Assets

          Like most Canadians, you may have more than one cash flow source for your retirement. You will have discretion about when and how much you wish to draw from your retirement assets and savings. Here are some of the common retirement income sources and assets:


          • Canada Pension Plan/Quebec Pension Plan (CPP/QPP)
          • Old Age Security (OAS)
          • Defined Benefit or Defined Contribution company pension plans
          • Life Annuity


          • Registered Retirement Savings Plans (RRSP)
          • Registered Retirement Income Funds (RRIF)
          • Tax-Free Savings Accounts (TFSA)
          • Non-registered investments & savings accounts
          • Home equity

          You should consider speaking with your TD advisor to review your optimal asset allocation based on your portfolio, financial/personal goals, estimated life expectancy and attitude toward risk.

          Spending stages during retirement

          Let’s assume there are three broad — sometimes overlapping — spending stages of retirement:

          • Active retirement years
          • Slowing down
          • Less active years

          The starting point for your planning will be to sit down to revisit your goals as well as any potential life events that could affect your spending.

          During your active years, you may be spending more than in any other stage of retirement. For example, will you be travelling extensively?

          Based on your family health history, what are the chances you will face some type of health challenge that will require you to slow down, and potentially incur expenses related to adjustments related to slowing down.

          In the less active stage, you may have decreased discretionary costs but greater medical expenses.

          Establishing a withdrawal strategy

          You’ll need to devise your withdrawal strategy based on your income and assets to meet your retirement goals across these three stages. There are many opinions and strategies as to what the best withdrawal strategy is during retirement. Will these strategies meet your retirement goals?

          Let’s look at some common withdrawal strategies, as well as an illustration that examines options when certain needs arise.

          1. Convert your RRSP to a RRIF before age 71:
            Let’s assume you have amassed a large RRSP and intend to convert it all to a RRIF at 71. However, if you expect lower amounts of retirement income prior to 71, you might consider converting your RRSP earlier to spread out the tax impact of the RRIF withdrawals. Remember that your RRSP contributions were tax-deductible and accumulated on a tax-deferred basis, and upon conversion to a RRIF, you are required to make annual minimum withdrawals which are included in your annual taxable income.
          2. Base RRIF minimums on your spouse’s age:
            If you have a younger spouse or common-law partner, you can decrease your required minimum RRIF withdrawals by basing them on your spouse’s or common-law partner’s age. The required annual minimum RRIF withdrawal is based on a prescribed percentage applied to your age at the beginning of the year multiplied by the value of your RRIF assets at the beginning of the year. This percentage increases as you age, thereby forcing larger amounts of RRIF withdrawals in later stages of retirement. However, if your spouse or common-law partner is younger than you, you can base your RRIF minimum on their age and prescribed percentage and, therefore, reduce the annual withdrawals required. Please note you must elect to set your minimum based on your spouse’s/common law partner’s age before you begin making RRIF withdrawals.
          3. Lowering taxes payable on your estate:
            For example, if you wish to leave a legacy to your children, you could look at the benefit of purchasing a life insurance policy, rather than increasing savings in a registered plan.
          4. Reinvestment strategy for investment income:
            If you have significant non-registered assets that include dividend-producing equities, and you have set up your account to automatically reinvest the dividends, depending on your retirement income requirements, you might consider receiving the dividends in cash instead of reinvestment. Generally, tax is payable on the dividend income in the year it is received regardless of whether it’s reinvested or paid out in cash. Perhaps you will need cash flow. Taking the dividends in cash could mean you’re diminishing withdrawals from your TFSAs or RRSPs, or selling stocks. Consider speaking with your TD advisor about the most tax-efficient way to manage your non-registered accounts, while striving to meet your retirement cash flow needs.


            Planning for retirement is crucial and you should work with your TD advisor to look ahead. Assess your retirement needs over time. Speak with your TD advisor about your asset allocation to review whether it’s appropriate to meet your needs. Active planning can give you confidence you have planned effectively for your retirement.


            • Taking a hard look at your retirement goals & needs, aiming to ensure you’ll have enough funds to support your retirement lifestyle goals.
            • Working with your TD advisor to build a solid retirement withdrawal plan that takes into accountyour spending estimates and any setbacks such as potential health concerns.
            • Reviewing your asset allocation based on your goals/needs during each stage of retirement.

            The information contained herein has been provided by TD Wealth and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. TD Wealth represents the products and services offered by TD Waterhouse Canada Inc. (Member – Canadian Investor Protection Fund), TD Waterhouse Private Investment Counsel Inc., TD Wealth Private Banking (offered by The Toronto-Dominion Bank) and TD Wealth Private Trust (offered by The Canada Trust Company).
            ®The TD logo and other trade-marks are the property of The Toronto-Dominion Bank.