Author Topic: Important question regarding Canadian RRSP deduction limits...  (Read 2140 times)

Olive Branch

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Hello everyone. I'm not sure this is the right forum to ask this question in, but I have an important question about RRSP contributions and deduction limits, as defined by the Canada Revenue Agency.

According to the CRA's RRSP and savings plans page, these are the values that I have available to deduct:

Quote
2015 RRSP deduction limit is $4,898.00
    Calculation of 2015 RRSP deduction limit
    Prior years RRSP deduction limits

Unused RRSP contributions available to deduct for 2015 is $3,634.00
    Calculation of 2014 unused RRSP contributions
    Prior year RRSP contribution history

The way I read this earlier in 2015 was that I could contribute $4,898.00 to my RRSP that year, and that I had an extra $3,634.00 to contribute on top of that, for a total of $8,532.00 to add to my RRSP. However, after getting my tax slip from Questrade and seeing the number again, my reading of this may have been wrong.

What I want to know is, what exactly was my RRSP contribution limit for 2015? Was I allowed to contribute only $4,898 but have the option to deduct $4,898 + $3,634 on my tax return to lower my taxable income so I could get to a lower bracket if I made a lot of money? Did I not deduct enough in previous years? Or was my original reading correct: I could contribute $8,532 in 2015 without being penalized, and now I have the choice to claim a deduction of $8,532?

I tried calling the CRA earlier in 2015 and they implied (but not certified) that my reading was correct, that I could contribute over $8,000 on my RRSP without fear of being penalized. But now that it's tax season, I want to make sure I didn't shoot myself in the foot.

Thanks!

Cathy

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Re: Important question regarding Canadian RRSP deduction limits...
« Reply #1 on: March 01, 2016, 09:45:18 PM »
First of all, the Canada Revenue Agency ("CRA") does not define RRSP contribution or deduction limits, or any of the other mechanics relative to RRSPs. This is instead the responsibility of the Parliament of Canada, which legislative body is authorised by the Constitution of Canada to establish "any Mode or System of Taxation". Constitution Act, 1867, 30 & 31 Vict, c 3, § 91(3). In exercise of that power, Parliament has enacted the Income Tax Act, RSC 1985, c 1 (5th Supp) ("ITA"), which (among other things) contains the rules governing RRSPs.

The CRA webpage text that you quote refers to two amounts: (1) "2015 RRSP deduction limit" and (2) "Unused RRSP contributions available to deduct for 2015". Let's figure out what each of these means.

Under the Income Tax Act, the "RRSP deduction limit of a taxpayer for a taxation year" (i.e. the first thing calculated on the CRA website) is generally equal to "the taxpayer's unused RRSP deduction room at the end of the preceding taxation year" plus "the lesser of the RRSP dollar limit for the year and 18% of the taxpayer’s earned income for the preceding taxation year", subject to various exceptions and special cases. ITA § 146(1). In other words, the "2015 RRSP deduction limit" is generally equal to the unused RRSP deduction room at the end of 2014 plus the lesser of the RRSP dollar limit for 2015 or 18% of the earned income for 2014. That is the first number shown on the CRA website.

But what exactly is "the taxpayer's unused RRSP deduction room at the end of the preceding taxation year"? Parliament was a bit obfuscatory here and defined this term by reference to a recursive formula (i.e. the definition includes the term that is being defined!) that has a special base case of zero that prevents infinite recursion. See ITA § 146(1). MDM would probably love this tax code. For our purposes, it suffices to say that "the taxpayer's unused RRSP deduction room at the end of the preceding taxation year" is basically equal to the amount that the taxpayer could have deducted including contributions that could have been made but were not minus the amount that the taxpayer actually deducted.

Turning to the second figure shown on the CRA website, "the amount of undeducted RRSP [contributions]" is also defined by a similarly awesome recursive definition. See ITA § 204.1(1.2). For our purposes, we can adopt a simpler approximation, which is that the "Unused RRSP contributions available to deduct for 2015" is basically the total of RRSP contributions which have been made for years up to and including 2014 but not yet deducted as of the 2014 return.

From this construction, we can see that (to an approximation) the "Unused RRSP contributions available to deduct for 2015" is a subset of the "the taxpayer's unused RRSP deduction room at the end of the preceding taxation year" which is in turn a subset of the "2015 RRSP deduction limit" as shown on the CRA website.

But we still haven't addressed your real question, which is: How much can you contribute to your RRSP for 2015?

The ITA imposes a tax on the "cumulative excess amount" inside an RRSP, which is defined to be generally the excess of the "individual's undeducted RRSP [contributions]" (i.e. the second figure given on the CRA webpage) over the sum of $2,000 plus the "RRSP deduction limit of a taxpayer for a taxation year" (i.e. the first figure calculated on the CRA website). See ITA § 204.1.

After all that, we find that, generally but with exceptions, the most you can contribute without penalty is equal to $2,000 plus the difference between the two figures on the CRA website. (Note that the $2,000 margin applies only once-per-lifetime, not per year. If you take advantage of that extra $2,000 once, you can't take advantage of it ever again without paying a penalty. This is actually a consequence of how all these terms have been defined and is not a special rule.)

I cannot and will not comment on the specific situation of the original poster, but, for the sake of example, I will use the numbers from the original post to illustrate the above analysis. Based on the numbers in the original post (but without actually commenting on the specific situation of the original poster), and assuming that none of the special cases not discussed are applicable, the hypothetical taxpayer could contribute at most an additional $4,898-$3,634+$2,000 = $3,264 without penalty (but $2,000 of that is the once-per-lifetime margin, which the hypothetical taxpayer may or may not want to use). After making such a contribution, the hypothetical taxpayer could take a deduction of $3,634+$3,264-$2,000 = $4,898, which of course just recovers the value given by the CRA.

So why doesn't the CRA just give you this on its website? I have no idea. But in any case, now that I have explained the meaning of the information on the CRA website, I will also draw your attention to the following two facts:
  • The information on the CRA website does not actually control your limits. Those are determined by the provisions of the laws enacted by Parliament. The CRA website could conceivably be incorrect.
  • You say that a CRA phone representative may have given you incorrect information about the meaning of the figures on the website. Even if this actually happened, it would of course be irrelevant to your true limits, because those are determined by the laws enacted by Parliament, not by the oral statements of CRA employees. However, the alleged phone conversation could conceivably be relevant to the determination of the tax for overcontribution, if that tax would otherwise apply. See ITA § 204.1(4).

Although this general information is intended to be helpful, there are a ton of exceptions and special cases that I have intentionally not discussed. Any of them could apply to you and therefore you cannot rely on this information. You should retain some sort of qualified tax advisor to help you resolve your specific situation.
« Last Edit: March 01, 2016, 10:31:28 PM by Cathy »

Retire-Canada

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Re: Important question regarding Canadian RRSP deduction limits...
« Reply #2 on: March 03, 2016, 09:29:10 AM »


Here is a sample RRSP Deduction Limit Statement:

- $28557 was the available contribution limit for 2014
- $24557 was actually transferred into the RRSP account in 2014
- $4000 was the amount of available contribution limit not utilized in 2014
- $13850 was new contribution limit for 2015
- $13850 + $4000 unused from 2014 = $17850 as the amount of contribution limit available for 2015***

In the example above $28557 could have been added to the RRSP account in 2014 which would mean that $13850 could then be added in 2015.

Have a look at your Notice of Assessment issued in 2015 and should be able to figure out how much money you were allowed to contribute to your RRSP.

*** - my example does not take into account the once per lifetime $2000 over contribution allowance
« Last Edit: March 03, 2016, 11:11:46 AM by Retire-Canada »

Cathy

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Re: Important question regarding Canadian RRSP deduction limits...
« Reply #3 on: March 03, 2016, 10:41:26 AM »
I'm confused by the replies here. I already fully, and correctly, answered the questions of the original poster, in as much detail as it was possible to do based on the information disclosed in the original post.


Have you tried logging on the MYCRA website? Its very simple to log into, and it should be very easy to understand what your limit is...

The original poster already logged into the "My Account" area of the CRA website. The original post contains a quote that he or she pasted from the CRA "My Account" website. The reason this thread was posted is that the CRA does not explicitly tell you the contribution limit. They give you two numbers (labelled (A) and (B) in the picture that Retire-Canada posted above), neither of which is the contribution limit. As I showed in my post above, the contribution limit is generally (although not always) equal to $2,000 plus the difference between the first and second number that the CRA gives you. (That difference can be negative, so the contribution limit can be less than $2,000.) The CRA does not expressly tell you this anywhere on their website, or on the Notice of Assessment. We can only speculate about why they don't calculate this for you.


... Have a look at your Notice of Assessment issued in 2015 and should be able to figure out how much money you were allowed to contribute to your RRSP.

Your description of the information on the Notice of Assessment is wrong in several important respects. Your interpretation might be correct in your specific circumstances, but it is not correct in general. In particular, it would be wrong for the original poster. My post above already contains the correct information.


I realise that my post above was long and complicated but that's because this question is complicated and warrants a complicated response. Simplifying things is valuable, and that's why I simplified it as much as I could without making it wrong.
« Last Edit: March 03, 2016, 10:44:36 AM by Cathy »