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
are not deductible on a Canadian tax return, and the gross employment income
before these deductions would be included in earned income.
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)
lessdeductible 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 2007 limit would be on your 2006
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
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
indexed
1/9 the MP limit
2012
indexed
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 will be 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 2008
$25,000
$45,000
$150,000
Deduction limit for 2009
= 18% of 2008 earned income,
to
maximum of $21,000
$4,500
$8,100
$21,000
The maximum of $21,000 for 2009 would be reached at an
earned income amount of $116,667 in 2008.
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 2009. The unused
deduction "room" of $11,000 can be carried forward and added to the
calculation of the 2010 deduction limit.
The information on this site is not intended to be a
substitute for professional advice. Each person's situation differs, and
a professional advisor can assist you in using the information on this web
site to your best advantage.
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