THE INs AND OUTs OF RRSP's

Registered retirement savings plans (RRSPs) were introduced in 1957 to provide an income tax incentive to save money for retirement. Taxpayers who contribute to an RRSP can deduct, within certain limits, their contributions from their income when filing their income tax returns.

Life insurance companies, trust companies, banks, credit unions and certain types of investment companies (including mutual funds companies) are authorized to issue RRSPs.

Basic concept
The RRSP provides certain tax advantages designed to encourage individuals to save for their retirement. They are:

. deferral of income taxes on the portion of income that is contributed to an RRSP
. deferral of income taxes on the investment income earned in the plan

The payment of income taxes is deferred until the money is withdrawn, generally during retirement from an annuity or registered retirement income fund (RRIF). At that time, the taxpayer's income tends to be lower than during the earning years and consequently the deferred income may be subject to a lower rate of tax. Amounts withdrawn prior to retirement are taxable at the individual's applicable tax rate.

Points to consider
Before contributing to an RRSP, individuals should ensure they:

. are willing to put aside money for spending during, not before, retirement
. have other assets available for emergencies
. are interested in deferring taxes
. qualify for the income tax deduction

2004 deduction limit
Attached to each taxpayer's notice of assessment for the 2003 taxation year is the "2004 Registered Retirement Savings Plan (RRSP) Deduction Limit Statement." The last line on that statement shows the RRSP deduction limit for the 2004 taxation year. Taxpayers who cannot locate their assessment notice may obtain the amount of their limit by calling the automated Tax Information Phone Service (T.I.P.S.) of the Canada Revenue Agency (CRA), formerly Canada Customs and Revenue Agency, at 1-800-267-6999. For members of a registered pension plan (RPP) this limit will be reduced by any net past service pension adjustment (net PSPA) reported by their employer for 2004.

The 2004 deduction limit available will be increased by any pension adjustment reversal (PAR) reported to an individual who forfeited benefits upon leaving an RPP or deferred profit sharing plan (DPSP) during 2004. The amount of the PAR adjustment must also be reported to the CRA who will then issue Form T1028 showing the revised 2004 RRSP deduction limit.

RRSP contributions for the 2004 taxation year may only be made until February 28, 2005.

2004 deduction limit
In order to maximize the deferral of income taxes on the investment income earned in the plan, many taxpayers start their RRSP contributions as early as possible. For the 2004 taxation year, this can be done at any time after Jan. 1, 2004. The maximum amount that can be claimed is the lesser of two amounts: 18 per cent of "earned income" for the 2003 taxation year (see below), or $14,500.

The deduction limit is increased by any unused RRSP deduction room carried forward from 2003. You can carry forward amounts earned since 1991.

What is earned income*?
In general, earned income consists of salary and wages, commissions, taxable benefits (e.g., group life insurance premiums paid by the employer), taxable family support income, net business income and net income from the rental of property. Earned income also includes research grants, Canada Pension Plan/Quebec Pension Plan disability payments, employee profit sharing plan allocations, supplementary unemployment benefits and certain royalties.

In calculating earned income, any employment expenses (such as union or professional dues, or salesperson's expenses) claimed by the taxpayer must be deducted. Earned income is also reduced by losses from business operations and the rental of property, and by deductible family support payments.

NOTE: Dividends, interest, annuities and pensions do not qualify as earned income.

This information is general in nature, and is intended for educational purposes only. For specific situations you should consult the appropriate legal, accounting or tax expert.