Here are some basic facts you need to know about pension and income tax.
Maximum Benefits from the Employer Pension Plan
The Employer Pension Plan must be registered with the tax authorities and must comply with all provisions and regulations of the
Income Tax Act. For example, the benefits that can be paid out of the Plan are limited by law.
Maximum RRSP Contributions
To encourage savings for retirement, governments allow you to make tax-deductible contributions to a personal RRSP. However, the
Income Tax Act limits the amount of income you can shelter from tax in a given year. The limit takes into account the fact that you participate in a company pension plan or not.
Your annual RRSP contribution limit is based on your earned income in the previous year and on your pension adjustment (PA) for that year.
Your pension adjustment represents the deemed value of the pension accumulated during the year in Your employer pension plan. It is calculated by your employer and communicated to the Canada Revenue Agency each year (box 52 of your T4 slip).
| RRSP contribution limit for a given year = |
| 18% of your earned income for the previous year, to a dollar maximum |
| LESS |
| Your pension adjustment for the previous year |
Since 1991, any unused portion of your RRSP contribution limit is added to your limit for the current year.
Your annual contribution limit is calculated by the Canada Revenue Agency and included on the
Notice of Assessment you receive after filling your income tax return.
There are two tax advantages to contributing to a personal RRSP:
- Your contributions are tax-deductible (up to the tax limit).
- Investment income grows tax-sheltered. You don’t pay any tax on your savings (capital and investment return) until you withdraw it from your RRSP or start receiving retirement income.
Tax Free Saving Account (TFSA)
A tax free saving accounts is another instrument that can be used to save for retirement. Any Canadian aged 18 and older can contribute a maximum amount (currently $6,000) to a TFSA, no matter how much income he earns. This amount will be indexed to inflation and rounded to the nearest $500 in later years. You can open several TFSAs in different financial institutions. However, the total amount invested annually in all accounts cannot exceed the annual maximum.
Unlike RRSP contributions, TFSA contributions cannot be deducted from taxable income.
Contributing to a TFSA does not have any impact on your RRSP contribution room; nor do RRSP contributions affect your TFSA contribution room.
The tax advantages of a TFSA are as follows:
- The money in your TFSA is tax-sheltered. You do not pay income tax on the returns generated by your investments in the account (including capital gains).
- You can withdraw money from your TFSA at any time and for any purpose, without any tax deductions.
- You can put amounts you have withdrawn from your TFSA account back into it without reducing your TFSA contribution room.
Any unused contribution room in a TFSA is carried over indefinitely, just like in an RRSP.
Taxation of Retirement Benefits
You must remember that tax assistance granted by government is only an income tax deferral. When you retire and receive pension benefits or withdraw money accumulated in your RRSP, this income will be taxable. In fact, even benefits from government plans such as the Canada or Quebec Pension Plan or the Old Age Security program, are taxable. However, your tax rate will likely be lower during retirement.
Search Content
