TaxTips.ca - RRSP contribution limits - Who can contribute, and how much?

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RRSPs RRIFs and TFSAs -> RRSP contribution limits

Who can contribute, and how much?

Anyone with "earned income" can contribute to an RRSP, up to and including the year that the contributor turns 71 years of age. Contributions can be made to a spousal RRSP up to and including the year that the spouse or common-law partner turns 71 years of age. This maximum age was increased from 69 to 71 by the 2007 Federal budget, giving people an additional two years to contribute.

Generally, earned income includes a taxpayer's income (earned while the taxpayer was resident in Canada) from the following:

income from office or employment reported on a T4 slip (line 101 of the tax return)

other employment income (line 104) - this includes foreign employment income, which must be reported in Canadian dollars.

Employment income on a US W-2 slip may have been reduced by contributions to a "401(k), 457 or 403(b) plan, US Medicare and Federal Insurance Contributions Act (FICA)". These amounts must be added to foreign employment income on line 104. However, based on the Fifth Protocol to the Canada - U.S. Income Tax Treaty (Article XVIII), starting with the 2009 tax year, these amounts may be deductible on line 207 of your tax return. See the CRA information on Line 207 - RPP deduction.

income (less loss) from a business carried on by the taxpayer, either alone or as a partner actively engaged in the business

income (less loss) from rental of real property

royalty income regarding a work or invention of which the taxpayer was the author or inventor

taxable support payments received

CPP or provincial disability pension income

amounts received under a supplementary unemployment benefit plan (not federal Employment Insurance)

less deductible support payments made

If the taxpayer was not resident in Canada, but had income from employment performed or a business carried on in Canada, this may also constitute earned income, unless it was exempt from income tax in Canada due to a tax treaty with another country.

Immigrants to Canada can get more information about Canadian income tax and RRSPs from the CRA publication T4055 - Newcomers to Canada.

The maximum RRSP contribution amount that can be deducted is called the "RRSP deduction limit", and is also known as "contribution room" or "deduction room". Your deduction limit is found on your Notice of Assessment or Notice of Reassessment from Canada Revenue Agency. Your 2011 limit would be on your 2010 Notice. The deduction limit is calculated as:

	18% of "earned income" for the preceding year, to an annual maximum (see following table)
	less the "pension adjustment" amount, for participants in a Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP)
	less any "past service pension adjustment", for participants in a RPP or DPSP
	plus any "past service pension adjustment" reversals
	plus unused deduction room carried forward from the previous year

The annual limits for RRSPs, money purchase (defined contribution) RPPs and defined benefit RPPs are:

Year	Annual Contribution Limits		Defined Benefit RPPs - Max Pension Benefit per Year of Service
Year	RRSPs	Money Purchase (MP) RPPs
2005	$16,500	$18,000	$2,000.00
2006	$18,000	$19,000	$2,111.11
2007	$19,000	$20,000	$2,222.22
2008	$20,000	$21,000	$2,333.33
2009	$21,000	$22,000	$2,444.44
2010	$22,000	$22,450	$2,494.44
2011	$22,450	$22,970	$2,552.22
2012	$22,970	$23,820	$2,646.67
2013	$23,820	indexed	1/9 the MP limit

The DPSP limit is 1/2 of the MP limit each year. The MP limit and DPSP limits for pension adjustment (PA) purposes are also restricted to 18% of compensation.

For each year after 2009 for RPPs and 2010 for RRSPs, the limits are indexed for inflation using the Industrial Aggregate average wages and salaries in Canada.

RRSP limits lag behind RPP limits by one year because RRSP limits are based on prior-year earnings, and RPP limits are based on current-year earnings.

Deduction Limit Examples for RRSPs	Taxpayer 1	Taxpayer 2	Taxpayer 3
Earned income in 2010	$25,000	$45,000	$150,000
Deduction limit for 2011 = 18% of 2010 earned income, to maximum of $22,450	$4,500	$8,100	$22,450

The maximum of $22,450 for 2011 would be reached at an earned income amount of $124,722 in 2010.

A taxpayer can contribute up to the amount of their deduction limit, plus an excess contribution as long as the total excess contribution never exceeds $2,000. Any excess contribution over $2,000 will be subject to penalties. It is not mandatory to actually deduct the entire deduction limit amount on the current year tax return. If the taxpayer will be in a higher tax bracket in the following year, some or all of the contribution made can be carried forward to be deducted in a future year. The advantage of doing this must be weighed against the disadvantage of receiving the tax refund in a later year.

If the RRSP contribution is less than the deduction limit, then the "deduction room" is carried forward to future years. Assume Taxpayer 3 made a contribution of only $10,000 for 2011. The unused deduction "room" of $12,450 can be carried forward and added to the calculation of the 2012 deduction limit.

Note re Home Buyer's Plan and Lifelong Learning Plan

Your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the Home Buyer's Plan (HBP) or Lifelong Learning Plan (LLP), or the contributions may not be deductible for any year. In other words, if RRSP contributions are made in the 89-day period just prior to an HBP or LLP withdrawal from the RRSP, the value of the RRSP after the HPB or LLP withdrawal must be at least equal to those contributions.

For further information, see the RRSP contributions section of CRA's T4040 - RRSPs and Other Registered Plans for Retirement.

To calculate savings from an RRSP contribution, see the Canadian tax calculator.

Tax tip: Pay yourself first.

Revised: January 28, 2012

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