RRSP Contribution

What is RRSP Contribution Limit in Canada?

The Canada Revenue Agency (CRA), the Canadian government agency coordinating the administration of savings and pension schemes, has announced the contribution limit for the 2021 RRSP. In addition to the RRSP, the CRA released the annual contribution limits of money purchase (MP), defined benefit (DB), registered pension plan (RPP) and the YMPE. 

The year 2020 has been remarkable, especially with the global pandemic outbreak, which halted economic activities, thereby thwarting most of our plans and goals. The majority of Canadians were forced to stay at home as a safety precaution. Through the CRA, the Canadian government sought to make life better for Canadians, most importantly retirees. One of the ways of doing that is making changes to the annual RRSP contribution limit. 

Overview of RRSP

Registered Retirement Savings Plan (RRSP) is a retirement saving and investment plan registered by the government for employed and self-employed Canadians to make contributions towards retirement. These contributions are tax-sheltered until withdrawal. Hence, you can use the deductible RRSP to reduce your tax. 

For 2021, the annual RRSP contribution limit will be $27,830, an increase of about 2 percent from the 2020 contribution limit of $27,230. With this, you can contribute an additional $600 to the RRSP, which can be used to save for retirement or as a tool to pay less tax and save more money.

RRSP Contribution Limits

Every year, the RRSP contribution limit is updated by the CRA. The annual contribution limit is calculated based on:

  • Your participation in a registered pension plan (RPP) or a deferred profit-sharing plan (DPSP) during the preceding tax year. (If you are a member of a pension plan, it will reduce the amount you can contribute to your RRSP). 
  • Your earned income for the year 
  • The contribution limit of the current year

You can generally open and contribute to an RRSP when you have earned income and filed your tax return. For 2021, your RRSP contribution must be the lesser of

  • 18% of your earned income in the previous year (your total annual income of 2020) as reported in your tax returns; or
  • The maximum contribution amount for the year 2021, which is $27,830.

You can contribute 18 percent of the previous year’s earned income or $27,830 (whichever is less) as your RRSP contribution. However, not everyone can take full advantage of the maximum contribution amount. 

For instance, if your total earnings for the preceding year 2020 is $124,000, your RRSP contribution will be $22,320 (124,000 x 18%), which is less than the 2021 contribution limit. If your total earning is $180,000, for example, your RRSP contribution will be $27,830 (maximum contribution amount). This is because $180,000 x 18% is $32,400, above the year’s maximum contribution.

Therefore to contribute the maximum amount in 2021, your 2020 earned income must be about $154,612. In the same way, to have maximum RRSP contribution in 2020, your 2019 earned income must be above $151,278.

YearRRSP Max Contribution LimitMinimum Previous Year’s
Earning for RRSP Max Contribution

RRSP Contribution Deadline 

The deadline to make your RRSP contribution for the year 2020 is the 1st of March, 2021. At the end of each tax year, you have 60 days to make an RRSP contribution for the previous year. 

There are many benefits to making your contributions earlier at the beginning of the year. To take complete advantage of your tax-deferred investment income, you can claim Registered Retirement Savings Plan (RRSP) contributions made during the first 60 days of 2021 as deductions from your 2020 income tax. RRSP contributions received after March 1, 2021, are not eligible for 2020 tax deductions. 

RRSP Deductions Limit 

Your RRSP contribution is different from the deduction limit. The amount can only match if you max out your contribution for the tax year. The RRSP deduction limit is the maximum amount that you can deduct from your income when calculating tax for any given year. The deduction limit is usually set by the CRA and can be found on the T1028 taxpayer form. Your maximum contribution limit cannot exceed the deduction limit. 

You can conveniently locate your RRSP deductions limit on your recent Notice of Assessment. You’ll receive the Notice of Assessment from the CRA after filing your tax returns. Alternatively, if you have a CRA My Account profile, you can access your RRSP deductions limit online. 

Carrying Forward RRSP Contributions 

If you don’t have money to contribute to this year’s RRSP or probably missed the deadline for your RRSP payment, you can carry forward the unused contribution room to future years indefinitely until you turn 71 years of age (the RRSP contribution age limit when you can no longer contribute to the RRSP). Your RRSP unused contribution room accumulates every year that you do not contribute the maximum contribution amount. You can find this in the previous year’s Notice of Assessment. 

For example, if your contribution room for 2019 was $18,000, but you could not make an RRSP contribution for that year, you can carry forward the unused contribution to 2020. If your contribution room for 2020 is $27,230, you can make a total RRSP contribution of $45,230 in 2020. That is $27,230 (2020 max contribution amount) plus $18,000 (2019 contribution room). 

RRSP Over-Contribution

Generally, the CRA frowns at over-contributions to an RRSP. Meanwhile, any over-contribution totalling up to (but not exceeding) $2000 at any time in the year is allowed without any penalty.

The penalty for RRSP over-contribution (including unused RRSP contribution from previous years and the current contribution) is 1% per month on the excess amount (unless you withdraw the excess amount). 

Qualified RRSP Investments

  • Bonds, shares, and other securities from a public company. 
  • Cash deposits. 
  • Guaranteed Investment Certificates (GIC) 
  • Treasury Bills (T-Bills)
  • Exchange-Traded Funds (ETFs)
  • Mutual fund trusts
  • Mortgage loans secured by a Canadian property.
  • Mortgage-backed securities 

RRSP Key Features        

  • You can open RRSP at any age as long as you have earned income and file a tax return. 
  • RRSP contributions are tax-sheltered, but withdrawals are taxable. 
  • RRSP contributions are tax-deductible. 
  • RRSP contribution age limit is 71 years of age. 
  • RRSP 2021 contribution limit is $27,830.
  • The CRA administers and coordinates the RRSP program.
  • You can contribute to your spouse’s RRSP.

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