Help clients calculate RRSP limits

As the clock approaches midnight on the March 2 RRSP contribution deadline, you may be asking clients to track down their notices of assessment (NOA) to find their contribution room.

Simultaneously, T4s are coming, and some box values lead to second-guessing the RRSP limit: Does the limit need to be adjusted to reflect the information on the T4?

Before fear of over-contributions starts creeping in, you can help clients review how these items may impact RRSP contribution limits.

What is my RRSP contribution limit?

The amount on a client’s NOA is their RRSP contribution limit for the current tax year (2019).

The calculation begins with their deduction limit from the previous tax year (2018):

RRSP/Pooled Retirement Pension Plan (PRPP) deduction limit for 2018 minus employer’s PRPP contributions for 2018 (if applicable) minus allowable RRSP/PRPP contributions deducted for 2018

This first section of the NOA determines the portion of RRSP room from the previous tax year that will carry forward and be added to the current tax year’s limit.

Next are the calculations to determine the current tax year’s deduction limit:

Carry-forward amount plus 18% of 2018 earned income (up to a maximum of $26,500) minus 2018 pension adjustment (if applicable) minus 2019 net past service pension adjustment (if applicable) plus 2019 pension adjustment reversal (if applicable)

Once the client has their RRSP/PRPP deduction limit amount for 2019, they subtract the unused RRSP/PRPP contributions previously reported but not yet deducted. That leaves the total available contribution room for 2019.

Not all RRSP contributions must be deducted in the same tax year. However, these RRSP contributions reduce your available contribution limit for the current tax year. It is important not to let the total undeducted amounts exceed your available contribution room, as this could represent an overcontribution to your RRSP.

Decode the jargon, please

With the available contribution room for the current tax year in hand, let’s look at some of the transactions that can impact a client’s RRSP room and when that impact takes place.

PRPPs and individual, group and spousal RRSPs

Contributions to RRSPs—including individual, group and spousal plans—along with Pooled Retirement Pension Plans (PRPP) are reported on contribution receipts. Contribution receipts will separate contributions made from March to December of the tax year and contributions made in the first 60 days of the current calendar year.

The amounts on these receipts can be subtracted from clients’ current available contribution room to determine how much more they can contribute to an RRSP before the deadline. Contributions in the first 60 days of the current calendar year can be deducted either on the tax return due in April (if there’s room) or carried forward and deducted in a future year.

For group RRSPs, the combined employer and employee contributions are reported on the contribution receipts.

Contribution receipts for spousal RRSPs include the account holder’s social insurance number as well as the contributor’s information.

Pension adjustment (PA)

Clients who are members of a defined benefit plan (DB), defined contribution plan (DC) or a deferred profit sharing plan (DPSP) can find the benefits earned in the current tax year in box 52 of their T4s or box 34 of their T4As. This PA reduces the next tax year’s RRSP limit.

Recall from the previous section that the 2019 RRSP limit was reduced by the 2018 PA. In other words, the PA on a 2019 T4 or T4A will not reduce available RRSP contribution limit for the current tax year (2019). It will reduce the available RRSP contribution limit for the 2020 tax year.

Past service pension adjustment (PSPA)

A PSPA is related to a DB pension. Specifically, it increases past pension benefits. An individual may have an option to buy back pension service, for example, which results in a higher future pension income after the purchase.

In other cases, pension plans may be retroactively amended to increase the pension formula, increasing the future pension income. PSPA reporting depends on whether it is exempt or requires CRA certification.

In both scenarios the reporting comes from the pension plan on either a T1004 (certified) or T215 (exempt). The result of these adjustments is a reduction in clients’ RRSP contribution limits. The difference lies in the timing of this reduction: PSPAs reported on a T1004 reduce the current year’s limit, while amounts reported on a T215 reduce the following year’s limit.

Pension adjustment reversal (PAR)

A PAR is an amount that is added to the RRSP contribution limit when a client leaves an RPP or DPSP. For a DB pension, it is the result of the termination benefit being less than the total PA and PSPA reported to CRA during the client’s plan membership. For DC pensions and DPSPs, a PAR can result when unvested employer contributions are forfeited when plan membership is terminated.

In essence, the PAR is restoring RRSP contribution room because the reduction of room in the past was too high. Clients are often notified of a PAR in writing from the employer or plan administrator. PARs are effective immediately and increase clients’ current RRSP contribution limits.

Registered pension plan (RPP) deduction

Clients can ignore this amount when calculating RRSP contributions. The deduction includes contributions to an RPP for the current tax year or contributions to past service for previous years. The amounts are reported on box 20 of clients’ T4s or box 32 of a T4As. While the amounts may be deductible against the current tax year’s income on line 20700 of the income tax return, they don’t impact RRSP room.

RRSP deadline season is one of the busiest for advisors. Helping clients find the information they need to calculate contributions can ease stress and save time.

To summarize: start with the available contribution room at the bottom of the NOA; subtract any RRSP contributions made since March 1; ignore the PA (it will reduce next year’s RRSP); subtract the PSPA on a T1004 (T215 amounts will reduce next year’s RRSP); add the PAR and ignore the RPP contributions. The amount remaining is your lucky number. Happy retirement saving.

Curtis Davis, FMA, CIM, RRC, CFP, is senior consultant for tax, retirement and estate planning services, retail markets at Manulife Investment Management.

Editor’s note: This article has been updated to include information about group and spousal RRSPs.

Curtis Davis

Tax & Estate

Curtis Davis, FCSI, CFP, TEP, is director for tax, retirement and estate planning services, retail markets at Manulife Investment Management.