RRSPs are a powerful tool for building wealth for small business owners. The problem is not everyone uses RRSPs to their fullest potential. Once you understand how RRSPs work, you will know exactly how to use them effectively and what types of investments work best inside an RRSP. First, we explain how RRSPs work. Then, we give wealth-building strategies to reduce taxes using RRSPs.

Quick Summary: If Your Time is Short

• Registered Retirement Savings Plans is a tax shelter for your investments. It is meant to help those without pension plans save for retirement.
• You can deduct contributions you make to your RRSP or your spouse’s RRSP. You need to make contributions within the first 60 days of the following year. For example, if you want a deduction on your 2021 tax return, you must make your RRSP contribution by March 1, 2022.
• Any income that your investments earn while inside the RRSP is not taxed.
• You pay taxes when you withdraw money from the RRSPs, usually, after you retire.
• Here are the two main reasons why RRSPs are beneficial.
  • First, your marginal tax bracket in retirement is likely going to be lower than today. The taxes you save from your RRSP contribution deduction today should be higher than the taxes you would pay when you withdraw money out of your RRSP in your retirement.
  • Second, your investment income compounds tax-free inside your RRSPs. In other words, your investments can grow faster.

Example of How RRSPs Work

Assume Dr. Bradley has $50,000 of RRSP room available.

Today, Dr. Bradley’s marginal tax rate is 40%. He expects his tax rate to decrease to 30% in retirement.

Suppose Dr. Bradley decides to contribute $30,000 to his RRSP in January 2022.

Bradley invests the $30,000 in an investment that produces a 10% rate of return every year inside his RRSP.

Dr. Bradley will receive a deduction of $30,000 against his 2021 or 2022 taxes since he contributed within the first 60 days of 2022. Bradley saves $12,000 ($30,000 x 40%) in taxes on 2021/2022. If he pulls out $30,000 in retirement, he should expect to pay $9,000 ($30,000 x 30%) in taxes. Just on timing alone, he saves $3,000.

There is more! The 10% annual rate of return does not get taxed while it is in the RRSP. This is powerful because Bradley’s investments compound at 10% annually. If he held it outside his RRSP, the investments would only compound at an after-tax rate of 6% (10% x (1- 40% tax)). This means that your investments compound at a higher rate of return.

The pre-tax compounding and the marginal tax rate difference between now and when you retire makes RRSPs a powerful tool for growing your wealth quicker.

Should You Contribute to RRSPs?

There’s no denying that RRSPs are a powerful vehicle for doctors. Your investments grow tax-free. Here are some pros and cons to weigh when you decide to contribute to your RRSPs. We discuss these in detail below.

Pro	Con
Tax deduction when you contribute to RRSP will lower your taxes	Need to pay taxes on earned income (i.e., salary) to generate RRSP room. Therefore, there is a cost you need to pay to “opt” into RRSPs.
Investment grows tax-free	Withdrawals get taxed as regular income (i.e., like salary). In contrast, the tax rate on dividends and capital gains is lower than the regular income tax rate.
Usually better off investing in fixed income-producing investments inside an RRSP rather than a corporation or personally.	Usually better off investing in capital gains producing investments inside a corporation.
RRSP Home Buyer Plan is a tax-efficient way for new doctors to save for a down payment on their first home ($35,000 for singles and $70,000 for couples).	There are restrictions on which types of investments you can hold inside an RRSP. For example, you cannot invest in cryptocurrencies or real estate.
RRSP Lifelong Learning Plan can help doctors pursue further education tax-efficiently.

Contributions to RRSP

How Much Can I Contribute to RRSP?

You can only contribute to RRSPs if you have enough RRSP room. To generate RRSP room, you need to have “Earned Income.” In other words, just like pension plans that workplaces offer, you need to earn it.

Your Earned Income in 2022 gives you RRSP room in 2023. RRSP room equals 18% x Earned Income, and the maximum room for 2023 is $30,780. This means if you want to maximize your RRSP room in 2023, you need Earned Income of $171,000 in 2022.

You can check out your RRSP room on CRA Online or your Notice of Assessment. (If you want to learn more about how to read your Notice of Assessment, click here for a helpful article from the CRA.)

Here’s what Earned Income includes:

• Salary
• Business income
• Rental Income
• Royalty income
• Support payments

Note that investment income like dividends, interest, and capital gains do not generate RRSP room. If you’re a doctor operating through a professional corporation, you need to draw salaries instead of dividends to generate RRSP Room.

Does Contribution Room Expire?

If you don’t use up your RRSP contribution room, it carries forward to future years. There is no restriction on this carryforward. Suppose your contribution room for 2022 was $10,000, and you only contributed $8,000. In that case, you can make a $2,000 deductible RRSP contribution in the future.

The problem with waiting to contribute means that you lose tax sheltering on your investment income every year you delay. So suppose the person in the above example waits until 2025. He or she loses tax-free growth from 2022 to 2025. Therefore, we suggest contributing as soon as possible.

What Happens If I Make Excess Contributions?

The short version is that there are severe penalties. There is a 1% per month penalty until you remove the “excess contribution” from your plan. (Note that there is a $2,000 allowance to provide a margin of error.) Avoid it at all costs because dealing with overcontribution is an administrative nightmare.

When you withdraw the “excess contribution,” make sure to remove it in the year of contribution or the following year. Otherwise, the CRA will tax you on the withdrawal. This will result in double taxation.

That’s why if you have multiple RRSP accounts, double and triple check to make sure you are under your RRSP contribution limit. If you are unsure, ask your accountant or financial advisor!

Withdrawing Money from RRSP

What Happens If I Withdraw Money?

If you withdraw money from your RRSP, you need to pay taxes on it. Also, when you withdraw money, it doesn’t replenish your RRSP room. For example, if your RRSP room was $10,000, you made a $10,000 contribution. Your contribution room becomes $0. If you withdraw the $10,000 from your RRSP, your contribution room is still $0. Therefore, you should be sure that when you put money into your RRSP, you are willing to leave it there for the foreseeable future. Otherwise, you’re wasting your hard-earned RRSP room (don’t forget you paid a lot of taxes to generate the RRSP room!)

Withholding Tax on RRSP Withdrawals

Also, when you withdraw money from your RRSP, your plan administrator has to withhold tax.

Withdrawal Amount	Tax
up to $5,000	10%
$5,001 to $15,000	20%
over $15,000	30%

You can claim the taxes withheld as a credit on your tax return.

Hack to Save Withholding Taxes

If you want to minimize your withholding tax, then take money out in $5,000 increments (or less). Note that you will end up paying the additional tax when filing your tax return.

Withdrawals Taxed as Regular Income

When you withdraw money from your RRSP, you need to pay tax. You are taxed on withdrawals at the regular income rate, not the capital gains tax rate (which is only half of the regular tax rate). Say you invest in shares that double in value. If you held this investment outside of your RRSP, you would’ve paid tax at the capital gains rate. If you like to learn more about how regular income vs. capital gains are taxed, read our ultimate personal tax guide here.

Investing in capital gains producing investments (like shares) in a corporation usually results in less tax than inside an RRSP. If you like to learn more about the tax benefits of investing in a corporation, check out our article here.

Suppose you have to choose between investing in capital gains producing investments personally (not via a corporation) or through an RRSP. In that case, an RRSP is often better because you need to pay an upfront personal tax if you invest outside the RRSP and will have less after-tax money to invest.

Small business owners who have corporations have a lot of tax planning opportunities available to them. RRSPs may not always be the best strategy. It is important to explore all the different tax planning available to you to make sure the money you invest will grow while eliciting the lowest taxes.

Investing in an RRSP

The government doesn’t allow all types of investments in an RRSP. Generally, you can only invest in publically traded investments, currencies, money.  

The government does not allow you to hold cryptocurrencies like Bitcoin inside your RRSP.

Also, due to the red hot real estate market, many small business owners gravitate towards real-estate investments! Unfortunately, you cannot hold real estate inside your RRSPs. (There are other creative tax strategies to hold real-estate investments in your RRSP, but that’s beyond the scope of this article.)

Can I Deduct RRSP Investment Fees?

You cannot deduct administration fees or investment counselling fees relating to RRSPs.

RRSP Maturity

Your RRSP must mature by the end of the year when you reach 71 years of age. At maturity, you have the following options:

1. Withdraw the accumulated funds from an RRSP: in this case, you will likely pay a huge tax and probably not the best strategy for doctors with professional corporations. This is especially true if you have a lot of money in your RRSP, as you will end up paying tax at the higher marginal tax rates.
2. Buy fixed-term or life annuities: that will pay out all your funds accumulated in your RRSP plan over a certain term (for example, until you or your spouse turn 90 years of age or pass away).
3. Convert the plan to a Registered Retirement Income Fund (“RRIF”): This is the most common choice that most people follow. It provides you with a minimum retirement income every year, and you can choose to withdraw more if you need to.

RRSP Tax Strategies

Spousal Contributions: Income Splitting using RRSPs

If you have RRSP contribution room available, you can use it to contribute to your own RRSP or your spouse or common-law partner’s RRSP. The benefit is that if your spouse is in a lower tax bracket, your spouse will pay taxes on any future withdrawals instead of you. In other words, you get the deduction today. Your spouse includes the withdrawals.

The government has rules to stop people from achieving short-term income splitting using an RRSP. If your spouse withdraws from the RRSP, any spousal contributions you made in the year of withdrawal and the preceding two years get included in your income instead of your spouse’s income.

So, if you want to take advantage of income-splitting, make sure you don’t make a spousal contribution within the three-year period before your spouse will withdraw money from his or her RRSP.

Home Buyer’s Plan

Under the Home Buyer’s Plan, you and your spouse can withdraw up to $35,000 each from your respective RRSP account without paying tax to buy or build a home. Your RRSP issuer will not withhold tax on withdrawn amounts.

You need to meet the four conditions below to qualify:

• you must be a first-time homebuyer. This generally means you or your spouse (or common-law partner) did not own a home in any of the past five years.
• You must have a written agreement to buy or build a qualifying home.
• You must intend to live in the home as your principal residence within one year after buying or building it. You cannot buy and rent it out.

One pitfall to watch out for is that you cannot just contribute (deduct) and withdraw right away for the HBP. The contributions need to sit inside your RRSP for at least 90 days before you can withdraw it for the HBP. Otherwise, you will not be able to deduct your RRSP contribution.

You have to pay back the withdrawn funds in increments over 15 years. The repayment period begins in the second calendar year from the withdrawal date. So, if you withdraw money in 2019, your repayment period starts in 2021. You must make the contribution on or before the RRSP deadline for 2021, which is March 1, 2022.

Suppose you don’t make the minimum repayments over the 15 years. In that case, you need to include minimum annual repayment in your income and pay tax.

Home Buyer’s Plan hack #1: Spousal Contribution & Supersize Your HBP

Above, we discussed you could make spousal RRSP contributions.

 In addition to your RRSP, you can contribute to your spouse’s RRSP to multiply your family HBP from $35,000 to $70,000. Suppose you like to buy a house and pay a down payment. To supersize your HBP, you contribute $35,000 to your RRSP and $35,000 to your spouse’s RRSP. You get to deduct $70,000 against your taxes.

You wait for the 90-day minimum period and withdraw the amount as an HBP.

You then use the $70,000 and the additional tax refunds you should get from your $70,000 deduction to help pay for your down payment. This is a tax-effective way for young doctors to save for their first home.

Home Buyer’s Plan hack #2: Generate Tax Refunds to Buy a Home

Suppose you need to make a down payment in April 2022 for your new home. This is how you can generate tax refunds to help pay for the down payment on your first home.

Assuming you have RRSP contribution room, you make a $35,000 RRSP contribution on January 1, 2022. You deduct this in your 2021 tax return. You file your tax return before the April 30, 2022 tax deadline and get a tax refund. In April, you withdraw the $35,000 as an HBP and use your tax refund to help pay for your down payment.

Lifelong Learning Plan

Many professional business owners continue their education in their careers. You are allowed to make tax-free withdrawals from your RRSP for lifelong learning.

You can withdraw a maximum of $10,000 per year if you are enrolled at a designated educational institution in full-time training or higher education requiring at least 10 hours per week. Also, the course must last at least three consecutive months. You can make further withdrawals for up to four years, but the total withdrawals cannot exceed $20,000.

Like the HBP, the contributions need to sit inside your RRSP for at least 90 days before you can withdraw it for the LLP.

You need to repay the amounts you withdrew over 10 years in equal annual instalments. You generally start the repayment the year after your study is completed. But if your study takes long, you need to begin repaying  60 days following the 5^th year after the first withdrawal.

Suppose you don’t make the minimum repayments over the 10 years. In that case, you need to include minimum annual repayment in your income and pay tax.

What Happens to RRSP When I Die?

Tax-Free Rollover to Spouse

When you pass away, you will generally need to pay tax on the fair market value of your RRSP or RRIF. However, you can defer this tax by naming your spouse as a beneficiary in the RRSP/RRIF contract or your will (see below why we recommend naming your spouse as the beneficiary directly in the RRSP/RRIF contract).

If you name your spouse as a beneficiary, they will either:

• Continue to receive income from the RRSP/RRIF (become the new annuitant); or
• Receive a lump sum amount from the RRSP/RRIF

If your spouse gets a lump sum amount from your RRSP/RRIF, to avoid taxes, they would need to roll the proceeds into their own RRSP or RRIF or by purchasing an annuity with the proceeds.

RRSP Hack: Save Probate Fees Via Beneficiary Designation

Ontario courts charge a 1.5% fee to probate (i.e., certify) your will. Suppose you can keep some assets out of a will, yet still have them pass to the proper beneficiaries. In that case, your family will save money on probate fees when they go to court to certify your will.

Suppose in retirement your RRSP is worth $2 million. That’s $30,000 of probate fees saved!

The above is why we recommend that you name your spouse or partner as an annuitant under the RRSP/RRIF contract directly to minimize probate fees. If you do this, your RRSP/RRIF will pass directly to your spouse outside of your Estate since the will does not govern it.  As a result, the RRSP/RRIF will not require probate.

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