One of the limitations on making deductible contributions to RRSP is your “earned income” for the preceding taxation year. The calculation of your contribution limit for the current year begins with the lesser of the a fixed amount per CRA for the year and 18% of your earned income for the preceding calendar year. Unused RRSP room from previous years will add to your current year’s room. You may find that on your notice of assessment. If you are a member of a registered pension plan, your RRSP room will be reduced by your “pension adjustment” for the preceding year.
What is earned income?
Add:
Employment income,
Net business income,
Net rental income,
CPP or QPP and disability pensions, and
Spousal support payments include in your income;
Less:
Net business and real estate losses, and
Deductible spousal support paid by you.
Set up an automatic contribution plan throughout the year. Either arrange to have deductions taken directly from your paycheque or have the funds debited from your bank account each month and deposited into an RRSP.
If you don’t have extra cash for an RRSP contribution, you may be better off borrowing the money than not contributing at all. The long-term benefits of deferring taxes and earning compound interest outweigh the interest costs of borrowing to make a contribution.
You may put in up to $2,000 more than what your qualified to give to your RRSPs without getting hit with penalties. You may wonder if this is a good idea to do. The longer in years the additional $2,000 stays in your RRSP, it continues to grow on a tax-deferred basis as long as it’s there. So later the $2,000 excess contribution can be taken out in a future year when your actual RRSP contribution is a lower amount than the maximum you’re allowed to put in.
