Recent revisions aimed at boosting the popularity of registered retirement savings plans include higher contribution limits, an expanded list of qualified investments and an extension to the age at which one may contribute to a plan.

But despite these changes, which have increased the opportunities for tax deferral and widened the scope of potential investments, the majority of Canadians appear to be taking a pass on RRSP contributions.

The latest numbers on RRSPs, compiled by Statistics Canada using tax files for 2006, show a year-over-year increase in the number of people who made RRSP contributions, with 60,000 more tax filers--6.2 million in all--contributing to RRSPs than in 2005.

Yet, just 31% out of the almost 88% of tax filers who were eligible to contribute to an RRSP in 2006 actually made contributions--no change from the percentage who contributed in 2005. What's more, although contributions grew by 5.8% in 2006 to $32.4 billion, that total accounts for just 7% of the total contribution room available, with the national median contribution standing at just $2,730.

Contribution room in a given year depends on qualifying income, which usually stems from employment in the previous year or unused room that has been carried forward from previous years.

Significantly higher contribution limits for 2006 and beyond were established in the 2006 federal budget. For 2007, the maximum contribution is the lesser of $19,000--an increase of $1,000 from the previous year's limit--or 18% of the previous year's earned income. (See table)

In a more recent change also designed to increase the use of RRSPs, the 2007 federal budget expanded the list of RRSP-eligible securities to include foreign-issued Canadian-dollar denominated bonds and virtually any securities listed on a designated exchange. High-risk derivatives remain off limits, while notable new inclusions are foreign-listed trusts and partnership units. The revamped qualified list took effect on March 19, 2007.

The 2007 federal budget also extended the age at which an RRSP must be converted to a vehicle that makes taxable payouts, such as a registered retirement income fund (RRIF) or an annuity. Now, an RRSP must be wound up by the end of the year in which the planholder turns 71, up from age 69.

That gives RRSP holders two additional years of tax-deferred compound growth for their retirement savings and also allows Canadians to make tax-deductible contributions to an RRSP for two more years, provided they have qualifying income.

While the move is meant to address the phase-out of mandatory retirement in many provinces in recent years and the fact that Canadians now tend to stay in the workforce longer, in reality, the new age limit marks a reversion: the age limit for RRSPs was initially reduced to 69 from 71 in 1996.

A less direct change that may affect RRSP strategies pertains to pension splitting and was introduced on Oct. 31, 2006, by federal Finance Minister Jim Flaherty at the same time he announced a new tax on income trusts.

The new rule, which took effect on January 1, 2007, allows a pensioner to split up to 50% of qualified pension income with his or her spouse. Qualified pension income for splitting purposes is generally paid by an employer-sponsored pension plan.

By comparison, contributions to a spousal RRSP generally allow the contributor, who is usually the higher-earning spouse, to reduce his or her income with a tax deduction. For tax purposes, this income-equalization strategy holds the potential for tax savings later on since withdrawn funds are taxed in the hands of the presumably lower-earning annuitant rather than be attributed to the contributor.

Even with the newfound ability to pension split, spousal RRSPs may still be worthwhile for many Canadians. One reason is that there is no restriction on the percentage of income that may be split using a spousal RRSP, while the new rules restrict splitting to 50% of pension income.

Another reason is that spousal RRSPs effectively allow pension splitting for someone who retires before age 65 and who may not have an employer pension plan. Remember, the just-introduced pension-splitting rule allows income from a corporate plan to be split before age 65, while RRIF or RRSP proceeds may be split only at age 65 and later. Before age 65, a contribution to a spousal RRSP may still allow the withdrawals down the road to be taxed in the lower-income spouse's hands.

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