RRSP contribution limit and deadline

RRSP contribution limit and deadline

We all know what an RRSP is. RRSP is a banking savings product which allows the taxpayer to exclude their annual RRSP contributions from their income for two specific purposes. Firstly, the annual RRSP contribution amounts are deducted from the income therefore the taxpayer will not be taxed on the amounts contributed. Secondly, the RRSP contributed amounts will continue to grow tax-free until the individual reaches the retirement age (71 years old). Yet many are confused by the RRSP deduction limit and how it is calculated. First thing first lets discuss what constitutes a RRSP deduction limit or contribution room.

Canada Revenue Agency defines it as follows:

The amount that you can contribute to your RRSP, PRPP (in addition to your employer's contributions), or SPP

The amount that you can contribute to your spouse or common-law partner’s RRSP or SPP

The maximum you can deduct on your tax return, reducing your tax for that year

The annual deduction limit is calculated by the CRA as follows:

Your previous year deduction limit (as per Notice of Assessment), PLUS (+)

The lesser of any of the following amounts:

Maximum deduction limit for the tax year ($29,210 for 2022, $30,780 for 2023)

18% of earned income in the previous year, PLUS (+)

Pension adjustment reversal, minus (-)

Net past service pension adjustment

Let's look at few examples. Josh earned $100,000 in 2023 and had $20,000 contribution room for 2023 as per his 2022 Notice of Assessment. He contributed $15,000 to his RRSP in 2023. How much is his contribution room for 2024? His contribution room will be $23,000 which is calculated as follows: (100,000 x 18%) + (20,000-15,000). Now lets assume Josh earned $175,000 for the year. How will that affect his deduction limit? In that case, Josh's limit will be $30,780 since 18% of $175,000 ($31,500) will exceed the maximum deduction limit for the year.

A common question asked by many: So what will happen if I contribute more than my limit? CRA will charge a 1% penalty per month on the amounts that exceeds your deduction limit by $2000. Lets assume you contributed $10,000 in excess of your contribution room. The CRA will charge you a 1% monthly penalty on the $8000 (10,000-8,000) or $80 per month.

The RRSP contribution deadline for the 2023 tax year is February 29, 2024. Any contributions beyond this date can only be claimed as a deduction on your 2023 income tax return.