Many of us make contributions to RRSPs in the first 60 days of the year, looking to make the most of our 2018 deductions. Any time we contribute to an RRSP account we need to be extremely mindful of our contribution room.
Every year, an individual’s RRSP deduction limit is calculated by adding the lesser of the two following amounts to your previously accumulated limit:
- 18% of your earned income in the previous year
- the annual RRSP limit (determined by CRA)
- Pension adjustments – if you are contributing to a company pension plan
- Past service pension adjustments
You are allowed a $2,000 over-contribution, however, anything in excess will be subject to a penalty tax of 1% per month on the contributions that exceed your RRSP deduction limit by more than $2,000. This can add up to a significant amount – in addition to requiring additional forms to be filed with CRA.
Make sure to contact CRA and your tax advisor before making RRSP contributions if you aren’t 100% sure of your limit! If you have over-contributed, you may be able to request that CRA waives some of these penalties – contact your tax advisor as soon as you can to start the process.