Tax Tip[] RRSP

New RRSP Investment Rules

“Advisors should review these new rules with clients who are contemplating acquiring private company shares.”

The March 22, 2011 federal budget has resulted in changes that adversely affect RRSP and RRIF investments.  For investments made after March 22, 2011 and for investments held on that date, the changes now extend the term “prohibited investment” from its original TFSA application to RRSPs and RRIFs. 

Generally speaking, a prohibited investment includes shares of a corporation, interests in or debt of a partnership or trust held by a RRSP or RRIF and either:

  • in the case of shares of a corporation, 10% or more of any class of shares of the corporation (or of a corporation, partnership or trust that does not deal at arm’s length with that corporation), are owned by the taxpayer (alone or with persons with whom the taxpayer does not deal at arm’s length),
  • in the case of partnership or trust, 10% or more of the fair market value of all interests (or of a corporation, partnership or trust that does not deal at arm’s length with that partnership or trust), are owned by the taxpayer (alone or with persons with whom the taxpayer does not deal at arm’s length),

or

  • the taxpayer does not deal at arm’s length with the corporation, partnership or trust, as the case may be.

Since the 10% rule relies on the “non-arm’s length” test, advisors should review all the relevant facts  with their clients in order to definitively determine the status of these investments.

The legislation now imposes two new penalties on the holder of a RRSP or RRIF that holds a prohibited investment.  The first penalty is  50% of the fair market value of the prohibited investment on the date it is acquired.  If the investment was not a prohibited investment prior to March 23, 2011 but became a prohibited investment, under the new rules, after March 22, 2011 or before October 4, 2011, this penalty will not apply.  Where the 50% tax applies, it can be refunded if the investment is sold or ceases to be a prohibited investment by the end of the calendar year following the year in which the tax arose (or on a later date if the Minister allows). 

The second penalty is a 100% tax on all realized income or capital gains attributable to prohibited investments, that accrued after March 22, 2011.  A special transitional measure is available to eliminate this tax if the taxpayer files an election in prescribed form by June 30, 2012 and the income earned or gains realized before 2022 are paid out of the RRSP or RRIF within 90 days after the end of the year in which the income or gains are earned or realized.  Presumably the relief from the penalty is provided because  the amounts paid out will  be subject to regular income tax in the  annuitant’s hands.  Please note that this penalty will apply even if the investment is exempt from the 50% penalty, based on the grandfathering rules mentioned above.

Advisors should review these new rules with clients who are contemplating acquiring  private company shares (or more than 10% of a public corporation) or  partnership or trust interests in their RRSP’s.   Taxpayers who already own prohibited investments in their RRSP’s should also be advised accordingly.   

In most situations, extracting the investment (or not acquiring it at all) will be the best course of action.  Extractions will usually be carried out with swaps of investments that are outside of the registered plans.  Such swaps are still permitted until the end of 2021.

To explore these issues further, please contact your TSG representative.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

RRSP Deductions

“”The timing of the RRSP deduction can result in significant tax savings”.”

With the 2011 RRSP contribution deadline fast approaching, we thought it would be timely to remind people that an RRSP deduction is discretionary.  In other words, a taxpayer can deduct from 0% to 100% of an RRSP contribution in any given taxation year.  Any undeducted RRSP contribution can be carried forward to be deducted in a future year.

The timing of the RRSP deduction can result in significant tax savings (or loss if the timing is not optimal).  For example, if a taxpayer is currently in a lower tax bracket then they expect to be in a future year, they could make their RRSP contribution (to begin the tax-free compounding) but defer the deduction until a later year when they are in a higher tax bracket.

For example, a university student may be in a low tax bracket and/or have tuition credits to eliminate tax in the current year.  If the student has sufficient earned income or RRSP room, she could make an RRSP contribution but defer the deduction to a post university year when she may be in a higher tax bracket.  If she can utilize the deduction at the highest marginal tax rate, she can save 46%, compared to, say, 20% if she used the deduction at the lowest marginal tax rate.   This 26% after-tax savings is  significant.

If finances do not allow the taxpayer to fund the RRSP contribution, they may consider a loan from a family member or a bank.  The pros and cons of borrowing to make an RRSP contribution are beyond the scope of this tax tip.

Readers are reminded  that it is better to make an RRSP contribution early in the year instead  of waiting  for the deadline.  The earlier the contribution is made, the earlier the benefits of tax free compounding begin.  Many people may be focused on meeting the February 29, 2012 deadline for a contribution to be deducted in 2011.  By that date they will already be 60 days late for making their 2012 contribution.

If finances permit, it may be worthwhile to make both the 2011 and 2012 RRSP contributions at the same time.

See Tax Tip 09-20 to learn how to request a reduction in source deductions as this may help a person fund their accelerated contributions.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Using an RRSP as Security

“Using an RRSP as security for a loan may be a better alternative than cashing in the RRSP.”

Many Canadians make annual contributions to their registered retirement savings plan (“RRSP”) to accumulate funds for retirement. The road to retirement is often bumpy, and falling offside of certain income tax rules can turn some of these bumps into potholes.

Taxpayers in difficult financial positions will often withdraw funds from their RRSPs. This results in an income inclusion of the amount withdrawn from the RRSP, as well as a reduction in available retirement funds.

Some taxpayers have pledged their RRSPs as collateral or security for a loan, perhaps not realizing the tax consequences.

While doing this may allow an individual to obtain funds without withdrawing investments from their RRSP, the pledging of the RRSP (or of any investment within the RRSP) will result in the full value of the pledged asset or assets being included in the taxpayer’s income for the year.

For a spousal RRSP, the normal attribution of RRSP income to a spouse who contributed within the past three years does not apply to this type of RRSP income inclusion.

Depending on the financial situation, using an RRSP as security for a loan may be a better alternative than cashing in the RRSP. The RRSP income inclusion will be the same as if funds had been withdrawn from the RRSP but the funds will remain in the RRSP for further tax-free growth. If the loan interest is tax deductible the benefit of maintaining the RRSP may be higher.

Once the loan is repaid and the security is released, the amount previously included in income can be deducted. An individual would not receive this deduction if they had cashed in their RRSP since their contribution room is not replenished when funds are withdrawn from an RRSP.

If the loan cannot be repaid, the RRSP assets can be used to satisfy the loan without being included in income a second time.

One should never use their RRSP or any of its underlying assets as security for a loan without fully investigating the income tax implications.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

RRSP Ineligible Investments

“There can be a high cost to purchasing ineligible investments in an RRSP.”

People make contributions to Registered Retirement Savings Plans (“RRSP’s”) every month and every year. They normally invest in qualified investments. Qualified investments generally include (this is not a complete list):

  • cash;
  • shares in companies listed on Canadian Stock Exchange and Prescribed Foreign Stock Exchanges
  • some shares in private Canadian corporations

Shares of private corporations are not qualified investments if the individual and immediate family members hold more than 10% of any class of shares.

In situations where an RRSP holds property that was a qualified investment, but subsequently became a non-qualified investment, a monthly tax of 1% is imposed on the fair market value of the investment at the time that it was acquired.

Where an individual acquired shares of a private company in which ownership was less than the 10% noted above, but eventually exceeded the 10% threshold, there would be a 1% penalty per month from the date that the investment became ineligible. The penalty would be calculated on a self-assessing basis, since RRSP investment details are not reported to the CRA by the trustee of the RRSP. The beneficiary of the RRSP would have to realize that there was an issue and remit the 1% per month tax to the CRA.

If property is distributed from the RRSP, the beneficiary is subject to personal income tax.

If an RRSP were to acquire a non-qualified investment initially, the fair market value of the investment at the date of purchase would be included in the beneficiary’s income in the year of acquisition. If an individual made a cash contribution to an RRSP, which purchased an ineligible investment in the following year, the purchase of the ineligible investment would result in an income inclusion to the individual in the year of purchase.

In addition to penalties, an RRSP that holds non-qualified investments will become subject to income tax at the top marginal rate on the income earned from such investments, including tax on 100% of any capital gains (not 50%) and 100% of otherwise exempt capital dividends.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.