Posts Tagged ‘RRSP’

RRSP Season For The 2016 Taxation Year is Ending Soon!

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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 Once the funds are withdrawn or payments are made from the plan, you will be taxed.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 31st 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 31st 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 1st, 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.

How RRSP Contributions Work

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A registered retirement savings plan (RRSP) is an account you can set up to save money for the future. There are immediate tax benefits in the year that a contribution is made to the plan. Also, RRSP investments can grow and not be taxed until the funds are withdrawn, often many years later.

But the big question is: how do RRSP contributions work?

Any taxpayer is entitled to contribute to an RRSP if they have “contribution room” (also called the deduction limit), although the contribution room is subject to an annual maximum limit.

The RRSP annual maximum limit for 2012 is $22,970 and for 2013, it is $23,820. In order to be eligible for this maximum limit, you must have had sufficient earned income in the previous tax year.  So this year’s limit is based in part on last year’s earned income (primarily employment or business income). Your deduction limit can exceed this amount if you have unused contributions carried forward from previous years.

The Canadian Revenue Agency (the “CRA”) calculates the RRSP deduction limit for the following year on every Notice of Assessment (“NOA”), which you receive each year after you file your income tax return (i.e. your 2013 annual limit will be reported on your 2012 NOA). Therefore, a taxpayer can simply refer to their NOA to determine their limit.

Excess Contributions

Excess contributions occur when you contribute more that you are permitted by more than $2,000. When contributions have been made of more than $2,000 over the contribution limit, a penalty of 1% per month is charged on this excess amount, until the excess contribution is removed from the plan.  Excess contributions are to be avoided at all costs, so if you are in doubt about how much to contribute to your RRSP, check it out carefully before you contribute.

When is the deadline for contributions?

The RRSP contribution deadline for the 2012 tax year is March 1, 2013. Therefore, if you contribute to your RRSP on March 1, 2013 or earlier, you can take the deduction on your 2012 tax return.

The very last contribution you can make to your RRSP is December 32 of the year you turn 71. However, it is possible for taxpayers over 71 to contribute to the RRSP of a spouse until December 32 of the year that their spouse turns 71.

The earlier you contribute to your RRSP, the more time you have for investments to grow tax free – so don’t wait until the deadline to contribute! Also the younger you start your RRSP account the better – compounding of income really takes off if you have a long period of time to run your RRSP.

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