Retirement Preparation

Contributions to Your RRSP

In order to be deductible in the current taxation year, contributions to your RRSP must be made either during the year or up to 60 days after December 31st of the current year. Contributions made in the first 60 days of the following year can either be deducted in the current year, or a future year. Contribution limits to your RRSP are in part based upon a percentage of your "earned income" from the previous year.

What is earned income?

In simple terms, "Earned income" is calculated from the following types of income:

salary or wages from employment - this amount is reduced by deductible employment related expenses such as union or professional dues; net income from a business carried on by a self-employed individual or by an active partner of a partnership; net rental income from real property;

Calculating your Contribution Limit

The annual RRSP contribution limit depends upon two factors: your prior year's earned income and the prior year's deemed pension benefit from your employessr pension plan, if applicable.

To calculate your current RRSP contribution limit you must follow a two step calculation:

Step 1: Determine your overall limit.
Calculated as the lesser of:
a) 18% x your prior year's earned income; and
b) the legislated annual maximum limit

• for 2009 is $21,000.
• for 2010 is $22,000.
• for 2011 is $22,450.

Step 2: Subtract your prior year's Pension Adjustment factor (PA.), if applicable. Once your overall limit is calculated, this amount must be reduced if you are a member of a pension plan. If you are not a member of a pension plan or a Deferred Profit Sharing Plan (DPSP), your overall limit calculated in Step 1 represents your actual limit for the

.

Members of a registered pension plan (RPP) or DPSP must subtract the pension adjustment factor indicated on their prior year's T4 slip from the overall limit calculated in Step 1. This pension adjustment factor is intended to represent the pension benefit the member will receive in the year. Reducing the overall contribution limit by a pension factor is intended to equate the retirement benefit provided to pension plan members with the benefit available to non-members.

Also, members of Defined Benefit pension plans may have a Past Service Pension Adjustment (PSPA) which will further reduce their available contribution limit. A PSPA could also result when a plan member purchases pension benefits in respect of prior years of employment after 1989.

The Carry Forward Rule

Beginning in 1991, individuals who do not contribute their maximum annual contribution to their RRSP can carry forward the "unused portion" and make the contribution in a future year. This "unused portion" can be carried forward indefinitely.

Be aware however, that waiting until a future year to "catch up" on deductible contribution room will in most cases, result in a smaller RRSP due to the loss of tax deferred growth.

Excess Contributions

The ability to make a contribution in excess of the available contribution limit was first introduced in 1991. This excess contribution limit was intended as a buffer to allow pension plan members to estimate their contribution limit early in the year and make a contribution, without the risk of incurring a penalty tax if they accidentally exceeded their actual limit.

Beginning January 1, 1996, the excess contribution limit was reduced to $2,000. Therefore, if you do not exceed your available contribution limit by more than $2,000 on a cumulative basis, a penalty tax of 1% per month on the excess amount will not be assessed.

If a contribution exceeds the $2,000 excess contribution limit, it must be removed to avoid the penalty tax. The removal of this excess amount from the RRSP may result in the inclusion of the excess amount as taxable income unless it is withdrawn in either: the year that it is contributed; the year the CCRA Notice of Assessment is received; or the following year.

Note: The $2,000 excess contribution limit is only available to individuals who have attained the age of 18 in a prior year.

Prior to January 1, 1996 individuals were allowed to make an excess contribution of up to $8,000. Individuals that made an excess contribution of more than the new $2,000 limit prior to February 27, 1995 are required to reduce this excess balance as soon as possible.

This is achieved by claiming the excess contribution amount as a deductible RRSP contribution starting with the 1996 tax year. Additional contributions will not be allowed until the excess contribution has been reduced to the $2,000 level. While this excess contribution limit was intended as a buffer against accidental excess contributions, it does present an opportunity to add additional capital to your RRSP and benefit from its tax deferred compounding.

It is important to remember that unless the excess contribution is carried forward and used as a deductible contribution in future years, it will effectively be double taxed.

This double taxation stems from the fact that there is no deduction when the excess contribution is made and it is taxed again when withdrawn from the RRSP.

Contributions made by Securities

If you don't have the cash to make your RRSP contribution, you can contribute eligible investments from outside your RRSP at their fair market value. For tax purposes, investments transferred into the RRSP (i.e. an in-kind contribution) are treated as if the investment was actually sold. Therefore, this transfer can result in the triggering of a taxable capital gain.

Unfortunately, if the fair market value of the transferred investment is less than its original cost, the resultant capital loss cannot be claimed. Also, any accrued interest up to the transfer date must be reported as income (i.e. interest that has been earned but not paid).