This year’s RRSP season is nearly over but it doesn’t mean you can’t start making contributions for the 2017 tax year. However, calculating how much contribution room you have can sometimes be difficult.
Determining the limit
If you can’t wait for your notice of assessment to find out how much you can contribute for the 2017 tax year, you’ll have to do a few calculations.
Your RRSP limit is 18% of your previous year’s earned income (such as employment or business income or net rental income) up to a certain maximum. In 2017, the RRSP dollar limit is $26,010.
If you only have one source of income, you’ve always maxed out your RRSPs, and you don’t belong to a pension and never have, the calculation will be quite simple. It’ll be your gross salary multiplied by 18% up to a maximum of $26,010. So if you made $50,000 last year, your RRSP limit this year is $9,000.
But if you have a workplace pension, there are a few additional calculations you need to make.
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Calculate your pension adjustment
If you belong to a pension plan at work, you need to determine what kind of plan it is. There are defined contribution (DC) and defined benefit (DB) plans. With a DC plan, the pension adjustment (PA) is the amount contributed by the employee and employer. So if you and your employer each contributed $1,000, your pension adjustment is $2,000.
But if you belong to a DB plan, the calculation is much more complicated because the way your pension benefit is calculated varies. There are typically three main forms: Flat benefit, career average, and final or best average.
Flat benefit—Your benefits are a dollar amount for each year or month of service. For example, if you’re a member of a plan for 25 years and the benefit amount is $60, your monthly pension is $1,500 (25 x $60) or $18,000 annually.
Career average—Your benefits are based on your average earnings during the time you were a plan member. For example, the formula can be 2% of your salary multiplied by the number of years you’ve been in the plan. So if your average salary was $45,000 and you were a plan member for 25 years, your annual pension will be $22,500 ($45,000 x 2% x 25).
Final or best average—Your benefits are based on your average earnings over a short period of time. For example, the formula is 2% of the final five years of your salary multiplied by the time you’ve been a plan member. So if your average salary was $50,000 in your last five years of employment, your annual pension will be $25,000 ($50,000 x 2% x 25).
To figure out your pension adjustment, you need to need to know what type of plan you have (ask your human resources department). Once you know that information, you need to determine the benefit earned. The pension adjustment is equal to the benefit earned in the year multiplied by nine and subtracted by $600: benefit earned x 9 – $600 = pension adjustment.
If you have a flat benefit and the benefit amount is $60, you multiply that number by 12 for the number of months in a year. The benefit earned is $720 ($60 x 12 = $720). Using the formula above, your pension adjustment is $5,880 ($720 x 9 – $600 = $5,880).
If your benefit is based on final, best, or career average earnings, you’ll have to use the earnings for the year the pension adjustment is calculated even if the benefits are based on earnings in future years. So if the plan formula is 2% of average earnings and your average salary is $45,000, your benefit earned is $900 ($45,000 x 2% = $900). Using the formula above, your pension adjustment is $7,500 ($900 x 9 – $600 = $7,500).
If trying to do the math is too complicated, the PA will appear on your notice of assessment.
Pension adjustment reversal
If you’re no longer a member of a pension plan, you’ll be subject to a pension adjustment reversal (PAR). This will restore lost RRSP contribution room if your termination benefit is less than the pension adjustments you’ve accumulated. The PAR can be found on your notice of assessment.
Past service pension adjustment
The past service pension adjustment (PSPA) is an alteration to past pension adjustments if benefits are improved retroactively. This is rare but your employer will let you know if one has occurred. The PSPA is on your notice of assessment.
Carry forward unused room
If you don’t max out your RRSP every year, you’ll be able to carry forward any unused contribution room accumulated since 1991. This is on your notice of assessment.
Calculating your limit
To calculate your RRSP contribution limit for the 2017 tax year, we’ll assume you had $22,500 in unused contribution room, you contributed $1,000 to your RRSP last year, you have an annual salary of $45,000, you currently belong to a pension plan, and you didn’t have a pension adjustment or a pension adjustment reversal. Here’s how to calculate your limit:
|Unused RRSP deduction limit in 2015||$22,500|
|Subtract RRSP contributions for 2016 tax year||-$1,000|
|Add 18% of earned income up to maximum limit||+$9,000|
|Subtract previous year’s pension adjustment||-$7,500|
|Add pension adjustment reversal (if any)||+$0|
|Subtract past service pension adjustment (if any)||-$0|
Alternatively, you can wait for your notice of assessment to arrive after you’ve filed your 2016 tax return before trying to max out your RRSP for the 2017 tax year as soon possible. Keep in mind you can overcontribute up to $2,000 to your RRSP in your lifetime without having to pay a penalty. But if you overcontribute more than $2,000, you’ll have to pay a penalty tax of 1% each month on the excess amount.
The bottom line
Calculating your RRSP contribution limit for the 2017 tax year is pretty easy if you don’t have a pension or you recently belonged to a plan. However, being a pension plan member can make the calculation a little more difficult. If you have a pension and insist on maxing out your RRSP every year, you can start RRSP contributions for the 2017 tax year. But you may want to consider waiting for your notice of assessment so you can get the exact number in case there’s the possibility you’ll go over your lifetime overcontribution limit.