How much can you contribute?
Your maximum annual RRSP contribution is based on your earned income in the previous year. Earned income includes salaries, employee profit sharing income, business income, disability pensions (issued under the Canada and Quebec pension plans), taxable alimony or maintenance, and rental income. For 2014 and later years, earned income also includes income contributed to an amateur athlete trust (for purposes of determining the RRSP contribution limit of the trust’s beneficiary). Your earned income is reduced by business losses, rental losses, union dues, employment expenses, and deductible alimony or maintenance paid. Retiring allowances, investment income, capital gains, pension income and business income earned as a limited partner are not classified as earned income.
If you are not a member of a registered pension plan (RPP) or a deferred profit sharing plan (DPSP), you’ll be able to contribute 18% of your 2014 earned income to an RRSP in 2015 to a maximum of $24,930. That contribution must be made within 60 days of the end of the calendar year which is February 29, 2016 for the 2015 taxation year. If you were not able to make the maximum contribution to your plan in any of the years from 1991 to 2014, you can also make up the difference in 2015 (see topic 59). Your 2015 earned income will determine your 2016 contribution limit.
Tax tip: Making the maximum RRSP contribution in 2015 will require earned income of at least $138,500 for 2014. Check the Notice of Assessment that the CRA sent to you after the assessment of your 2014 return. It will tell you how much you can contribute and should take into account any under contributions since 1991. It will also tell you if you have made any contributions that you have not yet deducted for income tax purposes.
If you have a self-directed RRSP, you can transfer other investments you own into your self-directed RRSP as part of your deductible contribution. Should their fair market value at the time of the transfer exceed your cost, the difference must be reported as a capital gain. However, if the cost exceeds their fair market value, you are not able to claim the capital loss. Therefore, it is not the best idea to sell or transfer losing investments to your RRSP.
It’s also possible to hold the mortgage on your home in your RRSP—it takes a bit of effort to set up and there are costs involved, but this arrangement can offer some advantages.
In certain situations, your RRSP can invest in shares of a Canadian private company if it carries on its business primarily in Canada. However, there are rules that will assess penalties where your RRSP holds a non-qualified or prohibited investment. One example of a prohibited investment is a share in a company in which you (and related parties) have an interest of 10% or more. The rules are extremely complicated, and you should consult with a knowledgeable tax adviser before using your RRSP to invest in private company shares.
When considering long-term investments, such as five-year guaranteed investment certificates (GICs), within your RRSP, keep in mind that you may have a problem if you need to withdraw the funds before the investment matures.
RPP and DPSP members
If you’re a member of an RPP or DPSP, your RRSP contribution limit will be reduced by an amount called the pension adjustment (PA). This adjustment represents the present value of the pension benefits you earned for the previous year in your RPP or DPSP. PA reporting is required as part of the T4 reporting process in February of each year.
There is another adjustment if your pension benefits are enhanced for post-1989 service. This particular adjustment— the past service pension adjustment (PSPA)—reduces your RRSP contribution limit for any given year.
One other adjustment—the pension adjustment reversal (PAR)—can increase your contribution room. You may receive a PAR if you leave your pension plan before retirement. This adjustment is intended to increase your RRSP contribution room where the PAs previously reported on your behalf exceed your termination benefit under the pension plan.
Example: Suppose you were laid off by your employer in 2015 and, based on your earned income for 2014, your 2015 RRSP contribution room was $14,500. If your former employer reports a PAR of $5,000 with respect to your participation in its pension plan, your revised 2015 RRSP deduction room will be increased to $19,500.
Based on the above, your maximum deduction for any one year will be calculated as follows: RRSP contribution room carried forward (see topic 59), plus 18% of your prior year’s earned income (to a stated maximum), plus any pension adjustment reversal (PAR), less your PA for the prior year, less any PSPA for the current year.
Subject to age restrictions, you may contribute any amount up to your maximum to your RRSP, an RRSP set up for your spouse or common-law partner, or a combination of both. RRSP annuitants may retain their RRSP and continue to make contributions to the plan until the end of the year they turn 71. However, if you have earned income and your spouse or common-law partner will be under 72 at the end of the year, you can still make a contribution to his or her plan, even if you’re 72 or older.