How to Calculate RRSP Contribution Room

How is RRSP Deduction Limit / Contribution Room Calculated?

How to Calculate RRSP Contribution RoomLong 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 of RRSP contribution limit is as follows:
$20,000 for year 2008
$21,000 for year 2009
$22,000 for year 2010
$22,450 for year 2011
$22,970 for year 2012
$23,820 for year 2013
$24,270 for year 2014

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 and dividends received from your company 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 earned income does NOT include pension income, regular EI benefit, interest income, capital gains, dividends or distributions from limited partnerships. You still need to pay income tax on those incomes; however, you cannot use them to calculate your RRSP contribution room (aka RRSP Deduction Limit).

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:

  1. Disability benefits received under the CANADA PENSION PLAN or the QUEBEC PENSION PLAN
  2. all salaries, wages, tips, and other remuneration from an office or employment
  3. NET income from self-employment
  4. Supplementary unemployment benefits – not regular EI benefits
  5. all amounts included in computing employment income by virtue of sections 6 and 7 (employment benefits and employee stock option benefits)
  6. all scholarships, fellowships, bursaries, prizes and research grants to the extent they are included in income under paragraph 56(1)(n) or (o)
  7. Royalties from any work or invention you created
  8. any governmental financial assistance as defined under paragraph 56(1)(r)
  9. incomes (excluding losses) from all businesses carried on alone or as a partner actively engaged in the business of the partnership; eg, NET rental incomes from real property
  10. Canadian-source business or employment income earned while non-resident
  11. Alimony and maintenance payments received

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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5 Responses to How to Calculate RRSP Contribution Room

  1. Mike on 2014/12/02 at 1:33 pm

    Is wage-loss replacement income earned income? I.e, from the federal Public Service Disability Insurance Plan.

  2. Suzanne on 2014/03/10 at 3:24 pm

    What about benefits on an interest free loan? Would they be included in earned income for RRSP contribution room calculations?

  3. J. Lewis on 2013/04/25 at 4:30 pm

    Since this is a benefit it is indeed income given to you by your company since you pay less than the rest of the market. It will depend on whether the shares are from public or private corporation on when you are taxed.
    Public – difference between option price and market valude included in employment income when exercised
    Capital Gain/loss recognized when sold
    Private – Included in employment income when sold, also recognize capital gain/loss at this point

    If included in employment income for this year, then they also need to be included as part of the “employment income” that you will use to calculate RRSP deduction limits.

  4. gw on 2012/04/10 at 3:54 am

    Hi – can you tell me if stock option benefits are included in earned income? tks.

    • Ryan A. Smith on 2012/04/10 at 11:45 pm

      I don’t think it’s income at all.

      It’s a benefit that allows you to buy a company’s stock at whatever share price is stated on the benefit. You don’t own that stock until you actually pay (invest) to buy the stock.

      When you sell the stocks, you may earn more money (capital gain) or lose moeny (capital loss).

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