You may be the beneficiary of a Registered Pension Plan (RPP), a Registered Retirement Savings Plan (RRSP), or both. It’s important to know the difference between the two plans and how they are reported in your income tax return.
Registered Pension Plans
A Registered Pension Plan is an arrangement by an employer or a union that provides pensions to retired employees through periodic payments.
Essentially, RPPs are the standard pension fund that many employees receive as part of their job. It is a group plan where your employee contributions are withheld at source from your pay and often matched — in whole or in part — by your employer. The plan is managed by a financial institution chosen by the employer, the union, or both.
If you are a participant in an RPP, you can deduct your employee contributions from your income on line 20700 of your return. The income earned by the plan is not taxable and you are not required to report it.
However, when you retire and begin to receive benefits from the plan, you will then need to include these payments in your income for the year when they are received. You either declare the income on line 11500 if you are receiving an annuity income which is a periodic-payment or on line 13000 if you are receiving a lump-sum payment.
Registered Retirement Savings Plans
A Registered Retirement Savings Plan is an individual retirement savings plan.
It can be established by any Canadian taxpayer and is registered with the Canada Revenue Agency (CRA). In practical terms, it is an investment account that you open with the financial institution of your choice and to which you or your spouse can contribute. RRSP contributions are deductible and can reduce your taxes. Deduct them on line 20800 of your tax return.
There is a maximum annual limit on how much you can contribute to your RRSP.
Your individual limit is calculated as a percentage of your income from the previous year and is subject to a maximum that applies to all taxpayers. For a single person, the contribution limit is 18% of your pre-tax earned income, up to the maximum limit of the tax year. Any unused contributions can be carried forward to future years. You can view your cumulative RRSP limit on your most recent notice of assessment or by logging into your CRA My Account.
The RRSP account can be managed directly by you or by a hired financial institution that manages it for you. Using your RRSP, you can invest in a large number of financial products such as term deposits, mutual funds, stocks, and bonds.
Any income the RRSP earns from these investments is exempt from tax as long as the funds remain in the RRSP account.
However, you must pay taxes whenever you make withdrawals from the plan. Withdrawals can be made at any time — you do not have to wait until retirement. Any withdrawals must be included on line 12900 of your tax return. The exception would be certain withdrawals made under the Home Buyer’s Plan (HBP) or the Lifelong Learning Plan (LLP).
You can only contribute to an RRSP until you reach age 71. When you reach this age, you will need to either close your RRSP and pay taxes on the full value of the account or convert it into a Registered Retirement Investment Fund, which is another type of account that allows you to continue to defer part of the income.
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