Tax planning

Individual savings plans 

Registered Retirement Savings Plans (RRSPs) are available to help Canadians save for their retirement years. In 2009, the Tax-Free Savings Account (TFSA) was introduced to Canadians age 18 and older to provide a savings vehicle to meet any ongoing savings need. 

The tax assistance provided by a TFSA is, in many ways, the opposite to that provided through RRSPs. 

• RRSP contributions are tax deductible, with both the contributions and the investment earnings taxable upon withdrawal. Withdrawals are included in income and considered in determining eligibility for federal income-tested benefits and tax credits 
• TFSA contributions are made from after-tax income, with both the contributions and the investment earnings exempt from tax upon withdrawal. Withdrawals will not affect eligibility for federal income-tested benefits or tax credits 

Determining which savings plan, or combination of savings plans, is best depends on an individual’s personal situation and objectives. Anyone saving outside of an RRSP would consider contributing to a TFSA first. 

Comparison of savings options 

1 Any income attributable to deliberate over-contributions will be taxed at 100 per cent. 
2 The withdrawal of amounts in respect of deliberate over-contributions, prohibited investments, non-qualified investments, asset transfer transactions and income related to those amounts does not create additional TFSA contribution room.

Annual contribution limits for TFSAs and RRSPs 

Source: Canada Revenue Agency. 

TFSA 

• Annual contribution limit is currently $6,000 per year. Increases, rounded to the nearest $500, will be applied as warranted by the consumer price index 
• Tax in respect of over-contributions is one per cent per month on the highest excess contribution at any time during the month 
• Withdrawals in a year will be added to contribution room in the following calendar year 
• Any income attributable to deliberate over-contributions will be taxed at 100 per cent. As well, the withdrawal of amounts in respect of deliberate over-contributions, prohibited investments, non-qualified investments, asset transfer transactions and income related to those amounts does not create additional TFSA contribution room

RRSP 

• Annual RRSP limit applies to the total contributions to all of an individual’s RRSPs, spousal RRSPs, and group RRSPs 
• Contribution limit = 18 per cent of earned income in previous year up to the annual dollar limit, adjusted for certain pension amounts 
• For clients over age 18, $2,000 over-contribution is allowed 
• Tax in respect of over-contributions (beyond $2,000 maximum) is one per cent per month on the excess amount at the end of the month 

Spousal RRSP 

• Contributor claims tax deduction, but spouse or common-law partner who owns the plan makes all the investment decisions and is the legal owner 
• Main advantage: opportunity for income splitting at any age and not limited to 50 per cent 
• Clients over age 71 who have available contribution room can contribute to a spousal RRSP if their spouse is under 72 
• Generally, attribution will apply on withdrawals made from a spousal plan if there were any contributions made by the spouse in the current calendar year or previous two calendar years

Registered Education Savings Plans (RESPs) 

Source: Canada Revenue Agency. 

¹ For families with income below the first federal tax bracket, the CESG will increase to 40 per cent on the first $500 contributed to an RESP. For families with income between the first and second federal tax brackets, the CESG will increase to 30 per cent on the first $500 contributed to an RESP for the year. Some RESP providers are currently not offering this feature. Federal tax brackets can be found in the tax tables here. 

Charitable donations tax guidelines 

• Individuals will receive a federal tax credit at the lowest federal tax rate (15 per cent) on the first $200 donated to charity, and 29 per cent on any remaining amounts¹ 
• An individual can claim an amount for total donations of up to 75 per cent of net income. In some cases, donations of capital property can increase this limit 
• Donors can claim total donations up to 100 per cent of net income in the year of death and the preceding year 
• Tax savings can be expected to range between 40 per cent and 50 per cent (depending on the province and any applicable surtaxes) for every dollar donated over $200 
• Donations can be used in the current year or carried forward up to five years 
• If an individual donates publicly traded securities directly to a charity, the usual 50 per cent capital gains inclusion rate is reduced to zero per cent. In other words, the tax credit is calculated on the fair market value of the donation but there is no tax to pay on the associated capital gains 
• For corporations, donations are generally deductible against income subject to certain limits 

For individuals who wish to give cash to a charity: 

• Ensure that the organization has a CRA charitable registration number. A charity cannot issue a valid tax receipt without one 
• Many charities will not issue a receipt if the amount of the donation is less than $10 
• Married and common-law couples can pool their donation receipts to maximize their tax credits. This will avoid having two $200 ‘thresholds’ 
• Donations can be deferred up to five years when the total claimed will exceed $200. For example, if the donor made a donation in 2021, they could carry it forward as far as 2026. 

1 Donations in excess of $200 qualify for the 29 per cent credit rate, except to the extent that the 33 per cent federal income tax rate applies; and will receive the 33 per cent credit rate on the lesser of the amount of those donations and the donor’s taxable income in excess of $216,511.

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Employer-sponsored plans – contribution limits and withdrawal restrictions by plan type 

1 Funds must remain in an RPP until termination of employment, death or retirement. 
2 A plan sponsor can also choose to provide more favourable provisions. 

What happens to locked-in pension funds? 

If an individual was previously a member of a pension plan, they may be entitled to transfer their locked-in pension funds to a locked-in RRSP (also called a Locked-in Retirement Account or LIRA). 

Locked-in funds are not generally available for cash withdrawal and must be used to provide some form of life retirement income. Various pension jurisdictions do allow for earlier access under the following circumstances: 

• Shortened life expectancy 
• Financial hardship 
• Non-residency status 
• Small-balance cash outs 

Partial unlocking when transferring to an income fund such as a Life Income Fund (LIF) or Restricted Life Income Fund (RLIF) 

Depending on the original pension legislation governing a client’s locked-in funds, at the maturity date of the plan (usually no earlier than age 55), the client can transfer funds to a Life Income Fund (LIF), Locked-in Retirement Income Fund (LRIF), Prescribed Retirement Income Fund (PRIF) or Restricted Life Income Fund (RLIF) 

Pension income splitting 

Spouses can jointly elect to split up to 50 per cent of qualified retirement income with their spouse or common-law partner. This can result in a reduction of family taxes and can also minimize the impact on income-tested tax credits and benefits. 

• For individuals age 65 or older, income from a pension plan and other registered plans such as RRIFs, annuities purchased from RRSPs and deferred profit sharing plans (DPSPs) qualifies for pension income splitting. In addition, the income reported on an annuity, including a Guaranteed Interest Contract (GIC), from a life insurance company qualifies 
• Under age 65, only income received directly from a pension plan, or received from other registered plans or an annuity because of the death of a spouse or common-law partner, qualifies for pension income splitting 
• Other income splitting options are available with CPP/QPP and spousal RRSPs. 
• CPP/QPP allows spouses who are at least 60 years of age to share up to 50 per cent of the benefits earned while they were living together 
• Spousal RRSPs provide income splitting at any age and are not restricted to 50 per cent

Registered Retirement Income Funds 

An RRSP must mature no later than December 31 of the year in which the RRSP annuitant turns 71. The RRSP can be cashed in, annuitized or, as more commonly done, converted to a RRIF. 

Minimum annual withdrawals 

To determine the minimum amount that must be withdrawn from a RRIF in a given year for a specific annuitant, multiply the January 1 fair market value of the RRIF by the factor associated with the annuitant’s age on January 1. Clients can opt to use the age of their spouse or common-law partner if this election is made before the first withdrawal. No minimum withdrawal is required in the year a RRIF is established. To maximize tax-deferred growth in the RRIF, set up withdrawals to occur on December 31. While RRIFs have a minimum that must be withdrawn in a year, there is no maximum. 

Source: Canada Revenue Agency 

1 A qualifying RRIF is generally a RRIF established before 1993. 

2 To calculate minimum annual withdrawals for below age 71, use the formula 1/(90-age). 

Withholding taxes 

Generally, all funds withdrawn from registered funds such as an RRSP, RRIF or LIF are fully taxable as income. Minimum annual withdrawal amounts from RRIFs or LIFs are not subject to withholding taxes. For withdrawals from an RRSP and withdrawal amounts over and above these RRIF/LIF minimums, withholding taxes are as follows: 

Source: Canada Revenue Agency, Revenu Québec. 

There is no tax withheld upon death if the deceased owner was a Canadian resident for tax purposes. 

Life income funds 

2021 LIF Minimum/Maximum Withdrawal Percentages 

Note: Quebec, Alberta, Manitoba, New Brunswick & British Columbia pension legislation permits LIF clients who begin a LIF in the middle of a calendar year with funds transferred from a LIRA or pension plan to take the FULL maximum payment for the year. First year payments under the other jurisdictions must be prorated based on the number of months the LIF was in force. 
1 Ontario New LIF, Ontario Old LIF, Ontario LRIF maximum calculation is based on the greater of a) the result using the factor and b) the previous year’s investment returns. 
2  Saskatchewan LIFs must be converted to a life annuity at age 80. 
3 British Columbia LIF maximum calculation is the greater of 1) the result using the applied factors and 2) the previous year’s investment returns under the same LIF contract. 
4 Alberta LIF maximum calculation is based on the greater of 1) the result using the new factors or 2) the previous year’s investment returns. 
5 Manitoba LIF maximum calculation is based on the greater of a) the result using the factor and b) the previous year’s investment returns + 6% of the value of all transfers in from a LIRA or Pension Plan during the current year. 

Canada Pension Plan 

Canada Pension Plan (CPP) rates are adjusted every January to take into account increases in the cost of living, as measured by the Consumer Price Index. 

Source: Canada.ca. 

1 If you are under the age of 70 and working outside of Québec while receiving your CPP or QPP retirement pension, you can make CPP contributions towards the Post-Retirement Benefit, a fully indexed lifetime benefit that increases your retirement income. Contributions are mandatory for working retirement pension recipients under age 65, while those aged 65 or above may elect not to contribute. If you are eligible, the Post-Retirement Benefit will be automatically paid to you the following year. 

Old Age Security 

Old Age Security (OAS) benefit rates are reviewed in January, April, July and October, and adjusted to keep pace with inflation, as measured by the Consumer Price Index. 

Source: Canada.ca. 

Guaranteed Income Supplement 

The Guaranteed Income Supplement (GIS) tops up the Old Age Security pension for seniors with low incomes. Low-income seniors, 60 to 64 years old, may be eligible for a related allowance if their spouse is entitled to receive the OAS/GIS or has passed away.