38 How much can you deduct on RRSP? How to calculate RRSP contribution limit?

Hoang Phuc

The amount of RRSP contributions that you can deduct based on your RRSP deduction limit, which appears on your latest notice of assessment or notice of reassessment, or on a T1028.

Under subsection 146(1), the maximum RRSP contribution a taxpayer who has not participated in an Registered Pension Plan (RPP) or a Deferred Profit Sharing Plans (DPSP), is calculated by formula

A+B+R–C, where:

A Unused RRSP deduction room carried forward from the previous year
B The lesser of 18% of taxpayer’s “earned income” for the preceding year, to an annual maximum

(Less): Prior year’s pension adjustment

R Your pension adjustment reversal (PAR) (if applicable)
C Your net past service pension adjustment (PSPA) (if applicable)

 

What is “earned income”? ITA – 146(1)

RRSP contribution room is based on “earned income”. Generally, earned income includes a taxpayer’s income (earned while the taxpayer was resident in Canada).

Include Deduct Exclude
Net employment income Union and professional dues Pension income (including CPP/QPP and OAS)
Business income (either alone or as an active partner) Business loss (either alone or as an active partner) Retiring allowances and taxable DPSP payments
Net rental income from real or immovable property Net rental loss from real or immovable property Amounts received from RRSP and RRIF
Taxable support payments received Deductible support payments made Death benefits
Qualifying performance income from an amateur athlete trust.
CPP or QPP disability benefits
Royalty income regarding a work or invention of which the taxpayer was the author or inventor

 

The annual contribution limits for RRSP ITA – 146(1)

Maximum deduction limit:

2022 $29,210 2019 $26,500
2021 $27,830 2018 $26,230
2020 $27,230 2017 $26,010

Example: Minh makes RRSP contributions of $11,000 in 2020. His unused RRSP deduction room carried forward to 2020 from prior years is $1,000. His income for 2019 includes:

  • $120,000 employment income
  • $5,500 pension adjustment
  • $1,200 interest income
  • $35,000 rental loss.

He is not a member of an RPP.

Minh’s RRSP deduction limit for 2020 would be calculated as follows (using the formula at the top of the page):

A:   $1,000 (his unused RRSP deduction room carried forward from previous year) plus

B:  $9,800 which is calculated as follows:

  • The lesser of
    • $15,300 prior year earned income (18% X prior year earned income of $85,000 ($120,000- $35,000)) and
    • $27,230 (annual maximum deduction limit for 2020)
  • Less $5,500 (pension adjustment)

Minh’s RRSP deduction limit for 2020 is $10,800. Because Minh makes $11,000 of potentially deductible contributions to RRSP, $1,200 in over-contributions may be carried forward and deducted in a future year.

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