Taxes & Retirement Savings: It's Simpler Than It Looks!

The tax system lets you accumulate a certain amount of savings tax free, until you withdraw the funds for use. Deferring taxes this way helps your capital grow faster. For retirement, it's possible with...

  • Supplemental pension plans (SPPs)
  • Deferred profit sharing plans (DPSPs)
  • Registered retirement savings plans (RRPSs)

The retirement savings provisions in the Income Tax Act (ITA) are based on the principle that taxpayers with the same incomes should be eligible for the same tax breaks, whether they contribute to a defined contribution pension plan, defined benefit pension plan, an RRSP, a DPSP, or a combination thereof.

The following table shows the new maximums referred to in this capsule.

Contribution Limit

Year Defined
Benefit Plan
Contribution (DC) Plan
2013 $2,696 $24,270 $24,270 $12,135
2014 and later Indexed (1/9 of the DC limit) indexed $24,930 Indexed (1/9 of the DC limit)

Pension Adjustment

  • The pension adjustment (PA) concerns SPPs. It is calculated based on the contributions made to an employer's pension plan during the year or the benefits earned.
  • It determines how much an individual can contribute to an RRSP after contributing to an SPP.

    If an individual has an RRSP contribution limit of $22,000, the PA for his or her SPP is $1,200 and he or she contributes $10,000 to a DPSP, the maximum contribution room for his or her RRSP will be $10,800 [$22,000 − ($1,200 + $10,000)].

Other tax credits can also apply at retirement:

  • Federal credit for natural caregivers
  • Provincial credit on home support services for seniors
  • Pension income tax credit
  • Age tax credit (age 65 and over)

It is important to point out that since the 2007 tax year, up to 50% of a person's pension income can be split between spouses. The tax rules vary depending on the source of the income (e.g., SPP or RRIF) and age. Income that qualifies for splitting is income that gives entitlement to the tax credit for pension income.

Tax-Free Savings Accounts

The TFSA, available as of 2009, is a registered savings plan that allows you to save money in the short, medium or long term. The TFSA's tax advantages are equally as enticing as those offered with retirement savings plans, if you use your TFSA to save for retirement.

Contributions to a TFSA are not tax deductible, but interest generated in a TFSA accumulates tax free and amounts withdrawn are not taxable. Consult the Flash Retirement Québec information capsule on TFSAs to compare the advantages of TFSAs with those of other retirement savings vehicles.

Supplemental Pension Plans: Benefits Are Taxable

In an SPP, the money generated by your investment is not taxed as it accumulates. However, any benefits you receive are entirely taxable at the time you receive them.

  • Defined Benefit Plans

    Since 1991, limits have been in place to prevent over-generous benefits. A pension adjustment is also calculated to reflect the value of the savings accumulated. Two other adjustments also apply:

    • Past service pension adjustment (PSPA): when the contributor buys back past periods of service or increases contribution levels for services provided after 1989.
    • Pension adjustment reversal (PAR): when the contributor stops working while the benefits due are less than the PA for the period in question. You don't have to declare a PAR if you retire and begin drawing a monthly pension from your plan.
    • The PA and PSPA lower your RRSP contribution limit, while the PAR raises it.
  • Defined Contribution Plans

    The limit on total contributions by the employer and employee is $24,930 for 2014. A PA applies, but not a PSPA or PAR.

Deferred Profit Sharing Plans

Some employers have policies on contribution limits, but the decision usually falls to the employee. The amount of contributions is matched by a PA, and cannot exceed $12,465 in 2014.

Registered Retirement Savings Plans

RRSPs are a way to save for retirement and defer taxes until you retire (deductible contributions and nontaxable returns).

The limit for 2013 is 18% of the income you earned in 2012, up to a maximum of $23,820. The PA for 2012 is deducted from this amount. Any contribution room you don't use accumulates.

Tax on Investment Returns

Taxes on investment returns depend on the nature of the returns. In 2013, the maximum tax rates are as follows:

  • 50.0% on regular income (interest, salary, withdrawals from an RRSP, SPP, locked-in retirement account (LIRA), life income fund (LIF), etc.)
  • 35.2% on dividend income
  • 25.0% (half of the regular income) on capital gains

While 50% of capital gains are taxed in the year they are earned, 50% of a capital loss can only be claimed against taxable capital gains earned in the same year or one of the 3 previous years. However, a capital loss can also be deferred indefinitely and deducted from taxable capital gains in the future.

When you make a withdrawal from your RRSP, the entire amount is taxed as normal income. Amounts withdrawn are not treated as investment income in registered plans, so there are no capital gains or dividends.

Advantages to RRSPs

You'll have more money to invest if you contribute to an RRSP because the tax deduction it qualifies you for will put more money in your hands.

The table below compares the performance of $1,000 invested in an RRSP versus a non-RRSP, non-TFSA investment of the same amount. Within an RRSP, this sample investment generates a $667 tax refund.

If you invest this $667 in your RRSP, your total investment jumps to $1,667. Since the investment grows tax free, the net rate of return equals the gross rate. (For an investment outside an RRSP, you would have to subtract the tax rate, which in this case is 2.40%).

If you invest $1,000 a year in an RRSP for 30 years and are taxed at 40%, your net gain will be $2,854 ($5,743 − $2,889) higher than if you had invested the same amount using a non-RRSP investment vehicle.

Non-RRSP and




Tax return



Net money out










Net performance



Accumulated balance









Consult the information capsule on TFSAs for a comparison of TFSA and RRSP contributions.

Important Considerations

  • Since returns are not taxed annually, you're able to save a higher amount. As shown in the example above, if you invest $1,000, are taxed at 40%, and earn 6% in returns, your balance after 30 years will be much higher if you invest the money in an RRSP.
  • Since your tax rate at retirement will probably be lower than when you contribute to your plan, this approach not only defers taxes, but also reduces your average tax rate.
  • Investors should use their unregistered savings to max out their RRSPs to avoid annual taxes on their returns. This optimizes return on investment by spreading the deduction out over a number of years, rather than all in a single year.
  • If you've maxed out your RRSP and accumulated additional unregistered savings, you can improve your net performance by concentrating the "share" component of your portfolio outside your RRSPs.
  • Even if you invest 100% in shares that generate a capital gain, your investments will always grow faster if they're within an RRSP.

RRSPs: What to Watch Out For

  • A withdrawal and its "performance" are taxed just like regular income. That means you won't have the benefit of a lower retirement tax rate for dividends and capital gains generated within an RRSP. However, RRSPs are still the best investment.
  • Saving in an RRSP is not necessarily the answer for low income workers. When they retire and withdraw their savings, the combination of the tax rate and the clawback of the Guaranteed Income Supplement may produce a higher tax rate than when they were employed. A TFSA will be a more effective tool for them. The public pension system should adequately support such people at retirement in relation to their previous employment income.

This text is intended exclusively to provide general information on financial security at retirement. This information may not be appropriate to the reader who wishes to obtain particular information on one of the treated subjects and cannot be a guarantee for results. It is up to the reader to make pertinent expert advice requests. This information capsule does not bind partner providers of these information.

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