LLQP Retirement and Savings Vehicles (RRSPs, TFSAs, RRIFs, RESPs) — Questions and Answers
Question 1: What determines a Canadian taxpayer's annual RRSP contribution limit?
- 18% of the previous year's earned income, subject to an annual dollar maximum (Correct answer)
- A fixed dollar amount set each year by the federal government for all taxpayers
- 25% of the current year's gross income regardless of employment status
- The lesser of current year income or the previous year's unused contribution room
Correct answer: 18% of the previous year's earned income, subject to an annual dollar maximum
RRSP contribution room equals 18% of the prior year's earned income, up to the annual indexed dollar ceiling published by CRA. Unused room carries forward indefinitely. The limit is based on earned income from the previous year, not the current year.
Question 2: A client over-contributes $5,000 to their TFSA. What penalty applies?
- A one-time 10% penalty on the excess amount
- 1% per month on the excess amount for each month it remains (Correct answer)
- 50% withholding tax applied when the excess is withdrawn
- Loss of TFSA contribution room for the following calendar year
Correct answer: 1% per month on the excess amount for each month it remains
CRA imposes a 1% per month tax on the highest excess TFSA amount in each month the over-contribution exists. The penalty accumulates monthly until the excess is withdrawn, so prompt action is critical.
Question 3: By what deadline must a Canadian convert their RRSP into a RRIF or registered annuity?
- December 31 of the year they turn 65
- December 31 of the year they turn 69
- December 31 of the year they turn 71 (Correct answer)
- December 31 of the year they turn 72
Correct answer: December 31 of the year they turn 71
Under the Income Tax Act, RRSPs must mature — be converted to a RRIF, used to purchase a registered annuity, or collapsed — by December 31 of the calendar year the annuitant reaches age 71. Failing to convert results in the full RRSP balance being included in income.
Question 4: A client is currently in the lowest marginal tax bracket and expects to retire in a higher bracket. Which registered vehicle is generally most advantageous for new contributions?
- RRSP, because the tax deduction today is guaranteed regardless of future bracket
- TFSA, because withdrawals are tax-free at any income level and contribution room is restored after withdrawal (Correct answer)
- RRSP, because it provides forced retirement savings discipline
- RESP, because government grants are available regardless of the contributor's age
Correct answer: TFSA, because withdrawals are tax-free at any income level and contribution room is restored after withdrawal
When a client's current tax rate is lower than their expected retirement rate, the RRSP deduction yields a small benefit now but withdrawals are taxed heavily later. The TFSA is preferred: contributions are after-tax but growth and withdrawals are completely tax-free, and withdrawn room is restored the following year.
Question 5: What is the lifetime RESP contribution limit per beneficiary?
- $25,000
- $36,000
- $50,000 (Correct answer)
- $75,000
Correct answer: $50,000
The Canada Education Savings Act sets a $50,000 lifetime contribution limit per beneficiary. There is no annual limit, but contributions exceeding $50,000 are subject to a 1% per month penalty tax. The government's Canada Education Savings Grant (CESG) is paid separately on top of contributions.
Question 6: Upon the death of a RRIF annuitant, which option allows the RRIF balance to transfer to a surviving spouse without immediate taxation?
- Estate freeze election filed by the executor
- Spousal rollover to the surviving spouse's RRSP or RRIF (Correct answer)
- Testamentary trust bypass provision under the Income Tax Act
- Automatic RRIF-to-TFSA conversion available to surviving spouses
Correct answer: Spousal rollover to the surviving spouse's RRSP or RRIF
When a RRIF annuitant dies and the surviving spouse or common-law partner is named as successor annuitant (or beneficiary), the RRIF balance can roll over to the survivor's RRSP or RRIF on a tax-deferred basis. This is one of the most important estate planning tools for married clients.
LLQP Retirement and Savings Vehicles (RRSPs, TFSAs, RRIFs, RESPs)
What determines a Canadian taxpayer's annual RRSP contribution limit?