Canadians who claim earned income on their annual income tax return can contribute to their own Registered Retirement Savings Plan or their spouse’s (or common-law partner’s) RRSP, up to their own individual limits until the year they turn age 71.

What is Earned Income?

The Canada Revenue Agency considers ‘earned income’ to be any amount which you receive as a result of employment reported on a T4 slip. It can also include income earned from a foreign country which you claim on your Canadian Tax Return, ie: income from a W2 slip which will be claimed under the Canada-US Tax Treaty (Article XVIII) 2009.

Income earned from a Professional Corporation or Business, Royalties paid to an inventor or author, Rental Income, CPP or Provincial Disability income, and certain taxable Support Payments all are included in calculating your individual contribution amount.

Money which is not included in the calculation; interest earned, dividend payments from Canadian and International Corporations, Annuity payments, Regular CPP income, Old Age Security, other pension income, Child Support, Employment Insurance and Welfare payments, or income earned in a foreign country which is exempt from Canadian taxation because of a tax treaty.

Annual Individual RRSP Contribution Limits

Annual RRSP contribution limits are 18% of your total earned income, up to a maximum of $22,450 for 2011. This amount is indexed to inflation and adjusted annually. In 2011 the maximum income level to calculate your RRSP contribution room is $124,725.

Annual RRSP Maximums

Your annual contribution limit, plus any unused contribution room carried forward, is included on your Notice of Assessment. If you misplace your Notice of Assessment you can log on to www.cra.gc.ca My Account, or phone the Canada Revenue Agency at 1-800-959-8281 to check your contribution limit.

Unused contribution room from the previous 10 years will automatically be carried forward. Therefore it is possible for someone who doesn’t contribute their maximum amount to their RRSP to accumulate significant room over a few years. The carry-forward can be used at any time, at your discretion.

As you can see from the chart above, just four or five years of unused contribution room can turn into $100,000 of available space for someone at the top of the range. A single $100,000 contribution in one tax year can wipe out your entire tax bill for that year, or even two or more consecutive years.

You can also deduct contributions made between January 1, 1991 and March 1, 2011 on your 2011 income tax return which have not been deducted in previous years. (Useful for the stray T-slip found in the desk drawer 3 years later.) 

Strategic use of RRSP contributions can allow you to reduce not only the tax you pay, but allows you to step down into a lower tax bracket, significantly reducing your overall tax liability.

Get a Bigger Paycheck

 If you make regular payments to your RRSP, either through payroll deduction, or direct withdrawal from your bank account which gets you a large refund each year; you can file a Source Deduction Waiver form T1213, which will allow your employer to withhold less tax from each paycheck.

Over-Contribution Penalties

Everyone is entitled to a lifetime $2,000 over-contribution to their RRSP. Amounts exceeding the $2,000 limit will be penalized at a rate of 1% of the amount over the limit per month that the money remains in the RRSP account.

Pension Adjustment

Employees who participate in a corporate pension plan will have their available RRSP contribution room reduced by the Pension Adjustment. This section will also include any ‘Past Service Adjustments’. This is also included on your Notice of Assessment.

Spousal RRSPs

Contributions you make to a Spousal RRSP in the name of your spouse or common-law partner are deductible by you, but are owned by the other person. This means that although you might have contributed the money in the account, and received a tax deduction for the contribution, you have no say over how it is invested or when it is withdrawn. Spousal RRSP contributions will be deducted from your allowable contribution room. If your spouse wishes to contribute as well, they will need their own separate RRSP.

Age Limits

As of 2011 you can contribute to your RRSP right up until December of the year you turn 71. You can continue to contribute to a Spousal RRSP until the year the holder of the account (your spouse) turns 71.

Homebuyers Plan Repayments

Repayments of withdrawals made to your RRSP under the Homebuyers Plan for first time homebuyers or the Lifelong Learning Plan for students starting/going back to college or university are not deductible even though you get a receipt for the contribution. File a Schedule 7 with your tax return, to document these repayments as separate from your RRSP contributions.

Tax Free Savings Accounts

For those people who regularly contribute the maximum allowed to their RRSP, a Tax Free Savings Account can provide an additional $5,000 (2011) per year, indexed to inflation, of supplemental savings room which can be used towards your retirement goals at your discretion.

Transfers Between RRSP Accounts

Under the rules, you can open as many RRSP accounts as you wish. You are free to transfer money and/or investment assets between these accounts without incurring any tax penalties. The transfer must be direct – account to account between the two account providers. Under no circumstances should the funds be withdrawn by you, and then a new account opened.

Transfers as a Result of Death or Divorce

In certain circumstances RRSPs can be transferred to another person as part of an estate or a divorce settlement. Again, the funds should not be cashed out and a new account opened. Instead open the new account and at that time your advisor will complete a T2220 form for direct transfer, the financial institutions will do all the processing for you.

Retiring Allowance

If your employer plans to pay you a retiring allowance when you leave, you can arrange for them to pay a portion, or sometimes all, of the allowance into your RRSP. This has two benefits. Firstly the money will bump your retirement income. Secondly, the employer won’t have to withhold income taxes from the portion of the Retirement Allowance transferred to the RRSP. This benefit can be significant if you are receiving an amount which could equal a full year’s salary or more.