Rules of RRSP Contributions

Anyone who has “earned income” such as employment earnings can contribute to an RRSP – up until December 31st of the year they turn 71.  Earned income may also include self-employment income, CPP/QPP disability payments, and net rental income.  Keep in mind that there are rules of RRSP contributions and limitations are placed.

Rules of RRSP Contributions – Maximum Limits

The allowable RRSP contribution limit for the year is the lower of:

• 18% of your earned income for the previous year, or
• the maximum contribution amount for the current tax year: $27,230 for 2020

Example: Jim is making a salary of $57,000 for 2019. For 2020, he has earned contribution room of $10,260. ($57,000 x 0.18% = $10,260).  If Jim has carry forward room, he may contribute over this amount.

• Note: If you’re a member of your company’s pension plan such as Defined Benefit Plan or Defined Contribution Plan, your pension adjustment will lower your RRSP contribution room. 
• Note: If you’re part of a Deferred Profit Sharing Plan and contributing, your pension adjustment will also lower your RRSP contribution room.
• Past Service Pension Adjustments (PSPA) and Pension Adjustment Reversals (PAR) will also affect your contribution room. PAR may arise when a taxpayer terminates their RPP or DPSP.

Minimum Age Restriction Contributions

There is no minimum age to contribute to an Registered Retirement Savings Plan. As long as the taxpayer has “earned income” and files a tax return, they may be able to set up and contribute to an RRSP.

Maximum Age Restriction Contributions

An account holder is allowed to make RRSP contributions up until the end of the year that they reach age 71. After age 71, the RRSP must be converted into a Registered Retirement Income Fund, also known as a RRIF. You may also purchase an annuity. If you have a spouse and they’re younger than you, you’re allowed to open a Spousal Registered Savings Plan and take advantage of tax benefits after the age of 71 by contributing into the spousal RRSP, pending you have contribution room. Contribution room can be generated if the taxpayer continues to work after 71.

Carry Forward Room Contributions

Taxpayers who aren’t able to maximize their Registered Retirement Savings Account contribution room are allowed to carry the unused portion forward indefinitely, up until 71 when it’s usually converted into a Registered Retirement Income Fund where you will draw an income.

Example: If you had available contribution room of $8,000 in 2018, $5,000 in 2019 – in 2020, you’re allowed to contribute $13,000.

Contribution Deadline 

It’s important to keep in mind the contribution deadline in order to take advantage of the tax benefits that RRSPs provide. Knowing the rules of RRSP contributions will allow you to take advantage of tax savings. For example:

• An individual can contribute into their RRSPs in the current year and up to 60 days after the end of the year.
  • For Example: Joe decided to hold off contributing into his RRSP for 2019 until February 14th, 2020. Joe is eligible to receive a tax benefit for 2019.

Rules of RRSP Contributions: Over Contributing

A tax payer is allowed to over contribute up to $2,000 above their available room without any penalties. If you have excess contributions above this amount, there is a 1% per month penalty.  It’s important that you withdraw this excess amount as soon as possible.

If you are aware that you over contributed into your RRSP, you must fill out the Individual Tax Return for RRSP, PRPP, and SPP Excess Contributions form. You must complete it and send it to the CRA. The applicable tax must be due within 90 days after the calendar year in order to avoid late fees and interest. If you fail to pay within 90 days, the CRA will penalize you:

• 5% of your balance owing
  plus
• 1% of your balance owing for each month that your tax return is late, to a maximum of 12 months

The rules of RRSP contributions may seem a bit complicated and we recommend you speak to a financial advisor.