A simple and effective way to save
60 years after its introduction, the RRSP program is still relevant
In case you missed the bank ads, the first two months of the year make up RRSP season, leading up to the March 1 contribution deadline.
But 2017 also marks the 60th birthday of the Registered Retirement Savings Plan, Canada’s go-to retirement investment vehicle.
Investors aren’t likely to put on party hats. But since the RRSP has been around for six decades — and thus is also heading into its golden years — wealth advisers think it’s time to reflect on how it has evolved.
“Any time you have an anniversary of something, it’s just interesting to look at what’s happened since they introduced it and consider how relevant it is,” says David Ablett, director, tax and retirement planning with Investors Group.
“And it is extremely relevant,” says the veteran tax planning expert.
Originally called a Registered Retirement Annuity, the RRSP was created in 1957 to encourage working adults and the self-employed to save for retirement, since pension plans were mostly only offered at private companies.
“When it was introduced, there was no Canada or Quebec Pension Plan. All they had was Old Age Security,” notes Ablett.
It took nearly another decade for the CPP and QPP to come onto the scene in 1966.
But before those pensions came along, there wasn’t exactly a rush to open the new savings plans. In fact, the average investor didn’t even know they existed.
“The introduction was very, very low-key. The only companies actually offering them at first were insurance companies,” Ablett says, noting that it took until the 1960s and 1970s for big banks to jump into the RRSP game for customers.
At first, contribution limits were 10 per cent of the previous year’s income to a $2,500 maximum.
And if an individual did not contribute in any given year, that year’s contribution room was “gone forever,” says Curtis Davis, director, tax and estate planning at Mackenzie Investments in Toronto. “Canadians were underwhelmed,” says Davis.
“It wasn’t until the 1970s that you started to see the concept of RRSP season,” Ablett says.
The federal government made more tweaks to entice investors. In 1974, spousal RRSPs were introduced, so withdrawals could be taxed at the rate of the lower-earning spouse. And in 1978, Registered Retirement Income Funds (RRIFs) were launched so that RRSP money didn’t need to be cashed out all at once.
The RRSP’s popularity really took off during the 1970s and 1980s. By 1987, almost 3.5 million individuals — more than one-fifth of all Canadian taxpayers — claimed RRSP deposits as a deduction on their tax returns, reports Statistics Canada.
The year 1990 was huge year for RRSPs, says Davis. “Contribution limits increased to 18 per cent of the previous year’s income, the dollar limit was raised to $11,500 and the contribution carry-forward rule was introduced, allowing unused room to be carried forward seven years.”
He notes that 1996 saw even more change, as the pension adjustment was introduced to level the playing field for contributors with employer pensions and/or deferred profit sharing plans.
“And finally, the seven-year carry forward rule was replaced with an indefinite carry-forward,” says Davis.
In recent years, though, the RRSP has faced stiff competition from the Tax Free Savings Account, which was introduced in 2009.
Today, roughly six million Canadians — or 23 per cent of tax filers — contribute to RRSPs.
They can also help first-time home buyers with down payments, and pay tuition through the Lifelong Learning Plan.
Ablett adds that although the savings device has definitely lost some of its shine compared to other investment strategies in recent years, “we never thought it would go away because of all the benefits it provides.
“Sure, not everyone is eligible to contribute or has the funds to do so. But no other tax-planning strategy combines simplicity with tax savings quite like the RRSP,” notes Davis.
Canadians had about $951 billion in unused RRSP room in 2014, according to Statistics Canada.