Your maximum annual RRSP contribution is based on your earned income in the previous year. Earned income includes salaries, employee profit sharing income, business income, disability pensions (issued under the Canada and Quebec pension plans), taxable alimony or maintenance, and rental income. Your earned income is reduced by business losses, rental losses, union dues, employment expenses, and deductible alimony or maintenance paid. Retiring allowances, investment income, capital gains, pension income and business income earned as a limited partner are not classified as earned income.
If you are not a member of a registered pension plan (RPP) or a deferred profit sharing plan (DPSP), you’ll be able to contribute 18% of your 2012 earned income to an RRSP in 2013 to a maximum of $23,820. That contribution must be made within 60 days of the end of the calendar year which is February 28, 2014 for the 2013 taxation year. If you were not able to make the maximum contribution to your plan in any of the years from 1991 to 2012, you can also make up the difference in 2013. Your 2013 earned income will determine your 2014 contribution limit.
Tax tip: Making the maximum RRSP contribution in 2013 will require earned income of at least $132,333 for 2012. Check the Notice of Assessment that the CRA sent to you after the assessment of your 2012 return. It will tell you how much you can contribute and should take into account any under contributions since 1991. It will also tell you if you have made any contributions that you have not yet deducted for income tax purposes.
If you have a self-directed RRSP, you can transfer other investments you own into your self-directed RRSP as part of your deductible contribution. Should their fair market value at the time of the transfer exceed your cost, the difference must be reported as a capital gain. However, if the cost exceeds their fair market value, you are not able to claim the capital loss. Therefore, it is not the best idea to sell or transfer losing investments to your RRSP.
It’s also possible to hold the mortgage on your home in your RRSP—it takes a bit of effort to set up and there are costs involved, but this arrangement can offer some advantages.
In certain situations, your RRSP can invest in shares of a Canadian private company if it carries on its business primarily in Canada. However, there are rules that will assess penalties where your RRSP holds a non-qualified or prohibited investment. One example of a prohibited investment is a share in a company in which you (and related parties) have an interest of 10% or more. The rules are extremely complicated, and you should consult with a knowledgeable tax adviser before using your RRSP to invest in private company shares.
When considering long-term investments, such as five- year guaranteed investment certificates (GICs), within your RRSP, keep in mind that you may have a problem if you need to withdraw the funds before the investment matures.