How retirees can accumulate RRSP room

When thinking about RRSP deduction room (often referred to as “contribution room”), employment and self-employment income often come to mind as key contributors. Indeed, these types of income are considered earned income for purposes of calculating available RRSP room.

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However, earned income isn’t restricted to employment and self-employment income. A number of other income types are also included, providing many Canadians with RRSP room well into their retirement years.

Calculating RRSP deduction room

RRSP deduction room is calculated as 18% of a taxpayer’s previous year’s earned income up to a dollar limit for the year. The amount is reduced by pension adjustments for contributions to a pension plan.

For 2017 the dollar limit is $26,010; for 2018 it’s $26,230. Unused room can be carried forward for use in any future year, although RRSP contributions aren’t permitted beyond age 71 unless contributing to a spousal RRSP for a younger spouse or common-law partner.

The following table lists common types of income that add to the earned income calculation, as well as items that reduce it:

¹Spousal and, where applicable, child support

Other types of income don’t factor into the calculation at all—that is, they neither add nor subtract from earned income. These types of income include investment income (interest, dividends and capital gains), retiring allowance payments, pension benefits (including CPP, QPP and OAS), amounts received from RRSPs, RRIFs, TFSAs and DPSPs, and death benefits.

Read: RRSP overcontribution woes

A sample case

With the transition to retirement—and the end of employment and self-employment—many Canadians assume that opportunities to contribute to an RRSP are no longer available. While this is the case for many, others continue to accrue RRSP room because they earn other qualifying income, such as net rental income. Consider the following example.

Kelsie, age 64, retired in December 2015. Beginning in 2016, in addition to OAS and CPP retirement benefits, Kelsie’s retirement income includes periodic payments from her registered pension plan and distributions from her non-registered mutual fund holdings. She also receives rental income of $1,200/month (after expenses) from a rental property she inherited from a deceased parent. Since retirement, her annual total income has been $80K.

In January 2018, Kelsie receives a call from her financial advisor, Leigh, inquiring about RRSP contributions for the first 60 days of the year. Surprised by the call, Kelsie promptly reminds Leigh that she’s retired and, as she understands it, no longer earns RRSP room. Also, because pension contributions reduce available RRSP room, Kelsie has no room carried forward from previous years. Kelsie never paid much attention to her CRA notices of assessment, so her conclusion that she has no room is based on the assumption that earned income ceases at retirement. Seeing an opportunity to help, Leigh promptly sets up a meeting with Kelsie.

Kelsie’s understanding of earned income is common, but incorrect. While it’s easy to make the connection between earned income and employment or self-employment income, the definition of earned income is much broader.

In Kelsie’s situation, while her pensions (government and private) and mutual fund distributions wouldn’t create RRSP room, her rental income would, to the extent that the income exceeds rental expenses. Her net rental income would count as earned income, allowing for RRSP contributions for the following tax year.

For 2016, Kelsie’s earned income is $14,400 ($1,200 × 12), which created RRSP room of $2,592 (18% × $14,400) for 2017. As Kelsie hadn’t made RRSP contributions for the 2017 calendar year, she had opportunity to contribute this amount during the first 60 days of 2018 and deduct it from any income on her 2017 (or subsequent year) tax return. In doing so, Kelsie benefits from an immediate tax savings and tax deferred growth on amounts contributed. She also benefits from reduced exposure to OAS clawback.

Read: How to minimize OAS clawback

This last point is one that often gets overlooked, especially by clients unfamiliar with the income-sensitive nature of OAS benefits. For 2018, OAS benefits are clawed back at a rate of 15% where net income exceeds $75,910. OAS benefits are fully eliminated at a net income of $122,843.

As Kelsie’s 2017 income exceeds $74,788 (the 2017 OAS clawback threshold), in the absence of RRSP contributions, she would be subject to an OAS clawback of roughly $782 (($80,000 − $74,788) × 15%), which would be returned to the government on her 2017 tax return. Alternatively, an RRSP contribution of $2,592 would reduce her 2017 net income to $77,408, cutting her clawback in half to $393 (($77,408 – 74,788) × 15%), saving her roughly $400 for the year.

While employment and self-employment income are easily identified as earned income, the calculation of earned income is much broader. In fact, many retirees will earn RRSP income well into their retirement years. Where this is the case, whether contributions should be made depends on a number of factors, including current and future tax rates, and short- and long-term objectives. Knowing the rules around earned income goes a long way in understanding options and opportunities in financial planning.

Also read:

RRSPs and TFSAs: unused contribution room at death

Common tax benefits and credits for seniors

Wilmot George , CFP, TEP, CLU, CHS, is vice-president, Tax, Retirement and Estate Planning at CI Investments. Wilmot can be contacted at wgeorge@ci.com.

Wilmot George

Tax & Estate

Wilmot George, CFP, TEP, CLU, CHS, is vice-president, Tax, Retirement and Estate Planning at CI Global Asset Management. Wilmot can be contacted at wgeorge@ci.com.