Segregated Funds in Your RRSP

The following outlines what a Registered Retirement Savings Plan is and the use of segregated funds as part or all of this kind of registered investment. Commonly referred to as an RRSP, a Registered Retirement Savings Plan is a tax sheltered and tax deferred savings plan recognized by the Federal and Provincial tax authorities, whereby deposits are fully tax deductable in the year of deposit and fully taxable in the year of receipt. The ability to defer taxes on RRSP earnings allows one to save much faster than is ordinarily possible because earnings grow tax free throughout the life of the plan.

Canadian taxpayers who are eligible to contribute to an RRSP receive a notice from Revenue Canada concerning the amount of their contribution limit with their income tax notice of assessment each year. Staying within this contribution limit, a person may have as many different RRSP's as one wants.

Eligible investments for RRSPs include cash, deposit accounts, bonds, stocks, mutual funds, segregated funds, and guaranteed investments.

The rules which apply to RRSP's stipulate that the holder of such a plan must convert it into income by the end of the year in which the holder turns age 71. The choices for conversion are to simply cash it in and pay full tax in the year of receipt, convert it to a Registered Retirement Income Fund (RRIF) and take a varying stream of income, paying tax on the amount received annually until the income is exhausted, or converting it into an annuity with guaranteed payments for a chosen number of years or for life, again paying tax each year on income received.

While the primary importance of an RRSP is to defer a part of your income until retirement years, there is nothing to prevent you from using some of these savings as an emergency fund to carry you through a period of unemployment or maybe a planned sabbatical from work. Please note that RRSP accumulations cannot be used as security for a loan. Should you do so, you risk having the full value of your RRSP which you have used as loan security, added to your taxable income. In addition, if an RRSP is used to purchase shares of a private corporation, and the shares are not a qualified investment under the taxation rules, then the value of the shares could be added to the RRSP holder’s taxable income. You are warned therefore that there may be tax consequences if non-qualified investments or loans are secured with an RRSP. Segregated Funds qualify for inclusion in your RRSP savings.

Spousal Registered Retirement Savings Plan

This is an RRSP owned by the spouse (plan holder) of the person contributing to it. Contributions to a spousal RRSP are given, not loaned. Once the money is in the plan, it is under the spouse's (plan holder's) control. Amounts withdrawn from a spousal RRSP will be taxed back to the contributor if the withdrawal is made within 3 years of the contribution date. (Since Revenue Canada considers the 3 years to be 3 calendar years, it is possible to contribute to a spousal RRSP on December 30th of the first year and 2 years later the spouse (plan holder) may access the money with it being taxed to the spouse (plan holder). To be eligible for spousal contributions, the spouse must be legally married to the contributor or have common law status as defined in the Income Tax Act, Section 252(4). Note: In the past, plan holders could set up a series of spousal plans for each spousal contribution and surrender each as it passed the 3 year eligibility period, thus avoiding the attribution rules. In 1990, Revenue Canada began emphasizing the any rule so that there would be attribution if spousal contributions had been made into any plan.

If the contributor so wishes, he/she can direct up to 100% of eligible RRSP deposits into a spousal RRSP each and every year. Contributing to a spouses RRSP reduces the amount one can contribute to one's own RRSP, however, if the spouse is a lower income earner, it is an excellent way in which to prepare for the spliting of income for lower taxation in retirement years. Let us be very clear in pointing out that whatever you contribute to your spouses RRSP is a full deduction from your own taxable income in the year in which you make the contribution.A contributor's deposits into his/her spouse's RRSP does not limit the amount which that spouse may be able to contribute to their own RRSP.

While the immediate tax reduction for a contributing spouse look like good tax planning, it would be prudent to make spousal contributions with the view that the future withdrawal of those funds is tax efficient. In other words, if one of the spouses expects to continue working after age 71 or if one of the spouses expects a large inheritance which might generate substantial income after age 71 then decisions made now without some planning could have negative tax consequences in the future.

The RRSP rules direct that you can no longer contribute to your own RRSP after the end of the year in which you become 71 years of age but if you are still earning income, contributions can be made to a spousal RRSP until that spouse reaches the age of 71.

Whether it's your own RRSP or a spousal RRSP we are able to advise you in the best way to preserve your capital and to take advantage of opportunities for solid future gains. We firmly recommend the advantage of having your RRSP's with insurance companies in order to enjoy the security of creditor proofing and, in the event of death, the avoidance of probate fees. If you have investments which are coming to maturity and you are not satisfied with the low rate of return you are currently receiving, let us show you how easy it is to transfer your investment from where it is now to one or more of the segregated funds that suits your need.

Subject to the applicable death and maturity guarantees, any part of the premium or other amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value according to fluctuations in the market value of the assets in the segregated fund.

Segregated Funds are only available to Canadian residents. Persons resident or located in other countries are not eligible to purchase these products or associated services. Within Canada, the information on this web site is not intended to be construed as an offer to sell any insurance products in the province of Quebec.

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