New Wrinkles Are Pain-Free

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There have been several positive changes to RRSP rules in recent years.

RRSP contribution limits

The 2007 contribution limit was the lesser of 18% of 2006 earned income or $19,000 (increasing to $20,000 for 2008). Remember that earned income not only includes employment, self-employment or professional income, but also rental income.

Conversion age

Last year's federal budget saw the age at which an RRSP must either be cashed out, used to purchase an annuity or converted to an RRIF, increase from 69 years to the end of the year in which you turn 71, allowing an extra couple of years for your funds to grow on a tax-deferred basis. Pension credit In 2006, the pension income credit available to RRSP holders aged 65 and over who convert to an RRIF doubled to $2,000. As a result, it's generally a good idea for those seniors who are at least 65 to convert at least part of their RRSP to a RRIF to take advantage of this credit well before age 72, the first year in which mandatory RRIF withdrawals are now required.

Pension splitting

The 2007 taxation year marked the first year that pension splitting with a lower-income spouse or partner was possible. You have to be at least 65 and convert your RRSP into an RRIF in order to have up to 50% of subsequent withdrawals split with your partner. New Canada Revenue Agency Form T1032 "Joint Election to Split Pension Income" must be signed by both partners and is used to allocate the amount of the pension income to be split.

Spousal RRSPs

Given the new ability to split pension income, should you still bother contributing to a spousal RRSP? For most the answer is "yes" for two reasons. First of all, with a spousal RRSP you can begin "splitting" before age 65, as the annuitant spouse or partner can begin withdrawing funds at any age. Secondly, with a spousal RRSP you're not limited to a maximum 50% split -- you can have the entire amount taxed in the lower-income spouse's hands upon withdrawal.

Creditor protection

Legislation that would extend creditor protection to all RRSPs and RRIFs in Canada upon bankruptcy was passed late last year but is not yet in force. The Standing Senate Committee on Banking, Trade and Commerce is holding hearings later this month on the new bankruptcy reform legislation. It is hoped this legislation will come into force sometime in 2008.