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Understanding RRSP Contribution Limits

Feb. 4, 2013
2 mins
A person uses a calculator while holding a tablet at a desk covered with jars of coins

When it comes to planning for the future, Registered Retirement Savings Plans (RRSPs) are certainly a popular choice.

According to a recent BMO Financial Group survey, two-thirds of all Canadians have RRSPs. After all, they are a fairly simple long-term savings option with the added bonus of immediate income tax savings. Yet for all their popularity, BMO found that only one-third of us are aware of what our RRSP contribution limits are. It’s important to know because if you were to put too much into RRSPs, you’d be subject to a penalty of one per cent per month.

Calculating the cap

Your annual personal contribution limit is based on your income from the previous year. You’re allowed to contribute up to 18% of last year’s income, provided that doesn’t exceed the maximum amount the Canada Revenue Agency sets for the year.

For the 2012 tax year, the maximum allowable RRSP amount is $22,970. (In 2013 it will be $23,820.) So if you made $50,000 in 2011, your RRSP limit for 2012 would be $9,000 ( 9% of $50,000). But if you made $150,000 (good for you!), 18% of that would work out to $27,000, so you’d be capped at the annual maximum rate of $22,970. Note that if you have a company pension plan, your RRSP limit is reduced by the “pension adjustment” rate you’ll find on your T4.

Keep calm and carry your unused amount on

According to the BMO survey, Canadians have accumulated about $500 billion in unused RRSP contributions.

Luckily, we’re allowed to carry forward any unused amount indefinitely. You’ll find your current total in the annual notice of assessment statement you receive after filing your taxes.

While you may be reading this and thinking, “I can barely scrape together $1,000 a year for RRSPs,” this fact may come in handy down the road. If you happen to earn a particularly large bonus or commission, instead of losing much of it to income tax, you can put some of that extra income into RRSPs and bring down your total tax bill for the year. (Ditto if you’re handed a severance package, but then land another job shortly thereafter.)

Or, say, you suddenly inherit a large sum of money. You could put a big chunk of it into RRSPs and, conceivably, bring your total income for the year down to $0, netting you a tax refund you could put towards your mortgage, car payment, or something more fun, like a holiday.

A savings time machine

You may not realize it but you’re also able to carry forward any unclaimed RRSP deductions going as far back as 1991.

So in case you somehow forgot to claim the deduction, or didn’t need to use it – say, for example, if you were on maternity leave and your income dropped significantly – you can put that unused amount towards your current taxes, provided you don’t exceed your personal contribution limit for the year.

Allan Britnell

Toronto-based freelancer Allan Britnell is an award-winning writer with nearly 20 years’ experience. He covers a diverse range of topics, including DIY and professional home renovation projects, nature and the environment, small business, personal finance, and family and health issues. He is also the managing editor of Renovation Contractor, the publication written for small- and medium-sized contracting and custom home building companies. He lives in Toronto with his wife, two daughters, and their dog, Oscar.

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