How to Calculate RRSP Contribution Room
How is RRSP Deduction Limit / Contribution Room Calculated?
Long Definition: a taxpayer’s RRSP deduction limit for a year is equal to 18% of the taxpayer’s earned income for the previous year (to a maximum amount) minus an amount in respect of benefits that accrued to the taxpayer under registered pension plans (RPPs) and deferred profit sharing plans (DPSPs) for the previous year [1].
Short Definition: a taxpayer’s RRSP deduction limit for a year is equal to 18% of the taxpayer’s earned income for the previous year (to a maximum amount). The maximum amount is $20,000 for year 2008; $21,000 for year 2009; $22,000 for year 2010.
Definition of “Earned Income”
“Earned Income” is not the same as Total Income (line 150), Net Income (line 236), Taxable Income (line 260), or Gross Income.
For example: interest earned in your saving accounts will not count toward earned income, but is still included in your total income (line 150) to be taxed. Only earned income is used in calculating RRSP contribution room.
The definition of “Earned Income” can be found in Income Tax Act subsection 146(1). It’s a very complicated definition, and I won’t dig it out. If you want to know, you can read the references [1, 2, 3], or read my summary below. 
Essentially, earned income consists of:
- a disability pension received under the CANADA PENSION PLAN or the QUEBEC PENSION PLAN
- all salaries, wages, tips, and other remuneration from an office or employment
- all amounts included in computing employment income by virtue of sections 6 and 7 (employment benefits and employee stock option benefits)
- all scholarships, fellowships, bursaries, prizes and research grants to the extent they are included in income under paragraph 56(1)(n) or (o)
- any governmental financial assistance as defined under paragraph 56(1)(r)
- incomes (excluding losses) from all businesses carried on alone or as a partner actively engaged in the business of the partnership.
Generally, an actively engaged partner is one who contributes time, labour and attention to the partnership business and the quantity and quality of the partner’s efforts are expected to be factors in determining the amount of partnership profits. The amounts described in (b) to (f) above are to be taken into account in calculating a taxpayer’s earned income even though these amounts, by reason of paragraph 81(1)(a) (statutory exemptions) or subsection 81(4) (payments for volunteer services), may not be required to be included in income.
References:
[1] Contributions to Registered Retirement Savings Plan
[2] BILL C-244
[3] SCHEDULE VII
[4] Income Tax Act IT-495R3
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