A Registered Retirement Savings Plan (RRSP) is a personal savings account registered with Canada Revenue Agency (CRA) to help you save for retirement and reduce your current income taxes. RRSP contributions are tax deductible and the earnings are tax-free as long as the money stays in the plan. Once the funds are withdrawn or payments are made from the plan, you will be taxed. You are able to contribute to your RRSP up to a certain limit for any tax year and any unused RRSP contribution room will be carried forward until December 31^st of the year you turn 71.

Contribution Limit

The RRSP deduction limit, which is the maximum annual contribution limit, changes annually and it is calculated as follows:

1. 18% of your earned income[i] from the previous year, up to a dollar limit which for 2016 is $25,370 (2017 – $26,010), less
2. the pension adjustment (PA) that was reported on your previous year’s T4.

If you have unused RRSP contribution room at the end of the previous year, you can increase your current year contribution accordingly. A quick way to find out your contribution limit is to look it up in the “RRSP Deduction Limit Statement” section of your latest notice of (re)assessment from the CRA.

Over-contributions and Penalties

RRSP contribution is a great retirement saving and tax deferral tool, but if you over-contribute you may be subject to penalty taxes. Over-contribution in excess of $2,000 is subject to a 1% penalty tax per month, until you withdraw the excess amount. A T1-OVP tax return is required for reporting the penalty tax. This return must be filed with the CRA by March 31^st of the following tax year to avoid a late-filing fee.

If the excess RRSP contribution is $2,000 or less, there is no penalty tax, but the excess contribution is not deductible until a new RRSP contribution room is available.

Contribution Deadline for 2016 Tax Year

The last day to make RRSP contributions that are eligible for the 2016 deduction is March 1^st, 2017 (60 days from December 31, 2016). Therefore, it is important to include and report all the RRSP contribution tax slips up to March 1, 2017 on your 2016 tax return.

Other RRSP tax planning opportunities, such as spousal RRSP contribution, home buyer’s plan or lifelong learning plan, are available. Please contact us for more information.

[i] Earned income includes salaries, wages, and rental income, but excludes investment income.