RRSP facts for Canadian physicians

1. RRSPs exist because of Canadian physicians.

More than 60 years ago, the Canadian Medical Association realized that Canadian physicians needed some help and lobbied the government for a tax-effective way to save for retirement — and the registered retirement savings plan, or RRSP, was born. Since then, the RRSP has become an essential account for many Canadians.

2. This year’s RRSP contribution deadline is March 1, 2023.

If you want to deduct your 2022 RRSP contribution on your 2022 income tax return, the last day to contribute is Wednesday, March 1, 2023. There are no exceptions. Most financial institutions, including MD Financial Management, have extended hours at the end of RRSP season, but it’s best not to wait until the last minute.

3. You need to have a salary in order to contribute.

If you’re an incorporated physician, you’ll need to pay yourself a salary to earn RRSP contribution room. Dividends do not generate RRSP contribution room. Your accountant and financial advisor can help you figure out how much to pay yourself.

4. The amount you save in taxes depends on your tax bracket.

As you probably know, your RRSP contribution can be deducted from your taxable income on that year’s tax return. What you might not know is that the higher your tax bracket, the more your RRSP contribution reduces your tax owing.

To illustrate this, let’s say Dr. Arthurs, an anesthesiologist in Ontario, works part-time and earns employment income of $100,000 a year. When she contributes $10,000 to her RRSP, her taxes will be reduced by about $3,500.

Her friend Dr. Kinloch, also in Ontario, earns $200,000 in employment income. If she contributes the same $10,000, she’ll get approximately $5,800 in tax savings.

Source: Ernst & Young 2022 RRSP savings calculator. Tax savings shown are for the province of Ontario. The numbers have been rounded.

Whatever your RRSP contribution generates in tax savings, you end up with more money that you can contribute to your RRSP in a future year, which would result in a kind of snowball effect.

5. A spousal RRSP can reduce total taxes for the household.

If you’re the higher earner in your household, you can contribute to a spousal RRSP in your spouse’s name and claim the deduction on your tax return. The tax savings will be greater than if your spouse made the same RRSP contribution and deducted it from their (lower) taxable income.

(Note: You are still limited to your own RRSP contribution room when contributing to both your RRSP and a spousal RRSP.)

Once you’re retired and drawing on your savings, the spousal RRSP can reduce household taxes again: your lower-income spouse pays tax on their withdrawals from the spousal RRSP — at their lower tax rate. In the absence of a spousal RRSP, the other way to achieve this is for you to split your pension income (including income from a registered retirement income fund) with your spouse. This allows you to move some of your pension income from being taxed at your higher tax bracket to your spouse’s lower tax bracket. 

6. You can borrow from your RRSP to buy your first home, but you’ll have to pay it back.

You can withdraw money tax-free from your RRSP to take advantage of the Home Buyers’ Plan (up to $35,000 per person, so that’s $70,000 for a couple). But you have to pay it back over the next 15 years. You start repaying in the second year after your initial withdrawal, so if you withdraw the funds in 2023, your first year of repayment will be 2025.

Because you’re merely putting the money back into your RRSP, you won’t get a tax deduction as you would with a regular RRSP contribution. If you don’t put the money back in your RRSP, your withdrawal is treated like a regular RRSP withdrawal, and you’ll have to pay tax (if you don’t make the scheduled payment, the amount that’s added to your income is equal to your outstanding balance divided by the remaining number of years).

7. A spouse or dependant is a wise choice of RRSP beneficiary.

Who will you leave your RRSP to when you die? Here’s an important fact: naming a “qualifying survivor” as your beneficiary can defer taxes on your death.

Normally, the fair market value of your entire RRSP would be included as income on your final tax return after you die, where it could be taxed at 50% or more. But here’s what happens if you designate any of these qualifying survivors as the beneficiaries of your RRSP account.

Your spouse or common-law partner: Your RRSP can be rolled over to their RRSP on a tax-deferred basis.

A financially dependent child or grandchild who’s a minor: The funds in your RRSP can be used to buy an annuity, and the child pays the tax on the annual annuity payments. All payments from the annuity must be made by the end of the year the child turns 18.

A child or grandchild who’s financially dependent on you because of a physical or mental disability (three different options):

• Your RRSP is rolled over to their RRSP or registered disability savings plan (RDSP).
• They receive all amounts in your RRSP and pay tax (at their tax rate) on its fair market value.
• The funds in your RRSP are used to buy an annuity, and the child or grandchild pays the tax on the annual annuity payments.

In Quebec, you cannot name beneficiaries on RRSP applications. This has to be addressed in your will.

The best way to reach your financial goals is to have a plan that considers the intricacies of your career in medicine, your personal circumstances, and the current environment. Contact an MD Advisor* and discover the difference physician-focused advice can make.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.

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Tax savings on a $10,000 RRSP contribution