In order to be deductible in the current taxation year, contributions to your Retirement Savings Plan (RRSP) 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.
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Contribution limits to your RSP are in part based upon a percentage of your "earned income" from the previous year.
Earned income includes:
Earned income must be reduced by the following amounts:
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:
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.
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.
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of this excess amount from the RSP may result in the inclusion of the excess amount as taxable income unless it is withdrawn in the year that it is contributed, the year the Canada Revenue Agency (CRA) Notice of Assessment is received or the following year.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 RRSP and benefit from its tax-deferred compounding.
If you don't have the cash to make your RRSP contribution, you can contribute eligible investments from outside your RRSP at their fair market value. For tax purposes, investments transferred into the RRSP (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).
Certain amounts may also be transferred into your RRSP in addition to your allowable RRSP contribution limit. These lump-sum transfers are allowed between registered plans on a tax-deferred basis. This includes: