Making Contributions to Your RSP
In order to be deductible in the current taxation year, contributions
to your Retirement Savings Plan (RSP) must be made either during the year
or up to 60 days after December 31st of the current year. Contributions
made in the first 60 days of the following year can either be deducted
in the current year, or in a future year.
To learn more, please choose from the following:
Earned Income
Contribution limits to your RSP are in part based upon a percentage of
your "earned income" from the previous year.
Earned income includes:
- Salary or wages from employment. This amount is reduced by
deductible employment-related expenses such as union or professional
dues
- Disability pensions paid under the Canada Pension Plan (CPP) or
Quebec Pension Plan (QPP) (you must be a resident of Canada when
you receive the payments) and taxable income from a disability
plan. Regular CPP and QPP retirement pensions do not qualify as
earned income
- Net income from a business carried on by a self-employed individual
or by an active partner of a partnership
- Net rental income from real property
- Payments from supplementary unemployment benefit plans (not
Employment Insurance)
- Taxable alimony or maintenance payments received
- Royalties and net research grants
Earned income must be reduced by the following amounts:
- Losses from a business carried on by a self-employed individual or
by an active partner of a partnership
- Net rental losses from real property
- Deductible alimony or maintenance payments
Contribution Limits
The annual RSP contribution limit depends upon two factors:
your prior year's earned income and the prior year's deemed pension
benefit from your employer pension plan, if applicable.
To calculate your current RSP contribution limit you must
follow a two-step calculation:
1. Determine your overall limit.
Calculated as the lesser of:
- 18% of your prior year's
earned income
- The legislated annual maximum
limit
2. Subtract your prior year's pension adjustment
factor (PA), if applicable.
Once your overall limit is calculated, this amount must be reduced
if you are a member of a pension plan. If you are not a member of a
pension plan or a deferred profit sharing plan (DPSP), your overall
limit calculated in Step 1 represents your actual limit for the year.
The Carry-Forward Rule
As of 1991, individuals that do not contribute their maximum
annual contribution to their RSP can carry forward the "unused
portion" and make the contribution in a future year. This unused
portion can be carried forward indefinitely.
Be aware, however, that waiting until a future year to "catch
up" on deductible contribution room will, in most cases, result
in a smaller RSP due to the loss of tax-deferred growth.
Excess Contributions
As long as you do not exceed your available contribution limit by more
than $2,000 on a cumulative basis, a penalty tax of 1% per month on the
excess amount will not be assessed.
If a contribution exceeds the $2,000 excess contribution limit, it must
be removed to avoid the penalty tax. The removal of this excess amount
from the RSP may result in the inclusion of the excess amount as taxable
income unless it is withdrawn in the year that it is contributed, the
year the Canada Revenue Agency (CRA) Notice of Assessment is received or
the following year.
Note: The $2,000 excess contribution limit is only
available to individuals who have attained the age of 18 in a prior year.
Prior to January 1, 1996 individuals were allowed to make an excess
contribution of up to $8,000. Individuals that made an excess contribution
of more than the new $2,000 limit prior to February 27, 1995 are required
to reduce this excess balance as soon as possible.
This is achieved by claiming the excess contribution amount as a
deductible RSP contribution starting with the 1996 tax year.
Additional contributions will not be allowed until the excess
contribution has been reduced to the $2,000 level. While this excess
contribution limit was intended as a buffer against accidental excess
contributions, it does present an opportunity to add additional capital
to your RSP and benefit from its tax-deferred compounding.
Contributions Made by Securities
If you don't have the cash to make your RSP contribution, you can
contribute eligible investments from outside your RSP at their fair
market value. For tax purposes, investments transferred into the RSP
(i.e. an in-kind contribution) are treated as if the investment was
actually sold. Therefore, this transfer triggers a taxable capital gain.
Unfortunately, if the fair market value of the transferred investment
is less than its original cost, the resultant capital loss cannot be
claimed. Also, any accrued interest up to the transfer date must be
reported as income (i.e. interest that has been earned but not paid).
Transfers into an RSP
Certain amounts may also be transferred into your RSP in addition to
your allowable RSP contribution limit. These lump-sum transfers are
allowed between registered plans on a tax-deferred basis. This includes:
- Retiring allowances (a lump sum payment in the form of a
retirement or severance package)
- Lump-sum transfers from a pension plan
- Transfers from another RSP
Take the next step…talk to an advisor.
For details regarding RSP contributions and transfers, please contact
an advisor. Or, ask an advisor to
contact you.
|
