One of the first steps in Canada’s push to build the social safety net turns 60 this year. The Registered Retirement Savings Plan was announced in the House of Commons on March 14, 1947 by Liberal finance minister Walter Harris as part of his party’s budget.
The Liberals would be defeated within months by former prime minister John Diefenbaker and the Conservatives, but the RRSP lives on as part of Louis St. Laurent’s legacy.
Why the RRSP was Established
The Liberals evaluated a general policy of allowing tax postponement on earned income at some private companies and saw the potential for everyday Canadians to have access to retirement savings through a similar program.
“It is now proposed to introduce a general policy of allowing tax postponement on limited amounts of earned income set aside for retirement by any taxpayer, whether an employee or not,” Harris declared in the House of Commons.
In 1957, the Canada Revenue Agency reported that taxpayers deducted $19 million for RRSP contributions, in stark contrast to the hefty $259 million that was deducted through company pension plans. This is because when the RRSP program was first introduced, it was heavily restrictive.
Canadians were only allowed to contribute 10 per cent of their income earned in the previous year with contribution limit of $2,500. The limit was even lower for those making contributions through an employer’s pension plan. The RRSP also didn’t allow for carry-forward.
Fortunately, the RRSP program has come a long way since 1957, whereas Canadians can now make contributions at 18 per cent of their previous year’s income with a limit of $26,000. The progress made in the RRSP’s development was made possible by the allowing the carry forward of unused RRSP room, beginning in 1990. All carry-forward limits were lifted in 1996.
The RRSP Today
The RRSP is remembered as one of the three pillars of Canada’s social safety net, alongside Old Age Security (announced in 1952) and the Canada Pension Plan/Quebec Pension Plan (announced in 1966).
RRSPs have dramatically increased the quality of life for retired Canadians with the conversion of all contributions into the Registered Retirement Income Fund at age 71. However, Canadians must be mindful of the RRSP contribution limit because $2,000 over will result in a penalty tax of 1 per cent per month of the overage amount, which will remove all benefits.
Although other programs such as the Tax Free Savings Account have arisen as an alternative form of saving vehicle, the RRSP remains popular because of its unique tax advantages. Those with an RRSP actually pay less in taxes in current year because their contributions are deductible against their income when filing their income tax return, with earnings not taxed until redeemed. When you do start withdrawing from your RRSP, it will be added to your income, thus subject to tax.
If you have big plans for your retirement and want to make the most of your current RRSP or would like to open a plan, give Elite Private Wealth a call today at 905-707-5620 or browse our investment services here.