Making contributions to an RRSP enables an individual to defer the inclusion of the contribution amount in their taxable income for a given year. The amount contributed to an RRSP is deducted from the individual’s taxable income thereby reducing the income tax payable until a future date when the contributions are withdrawn from the RRSP.
The amount that an individual can contribute is calculated using the prior year’s Eligible Earned Income as it appears in the previous year’s income tax return.
Most individuals only have employment income, which is reported on your T4 Income Tax Information Slip. But other types of Earned Income include the following:
- T4 Employment Income; less annual union dues, professional dues and employment expenses
- Foreign Employment Income
- Net Income from self-employment or a business in which you were an active partner
- Net Rental Income from real property
- Royalties from an invention or work that you are the author
- Alimony or Separation allowances, less deductible Alimony or Separation allowances paid
- Net Research Grants
- Employee Profit Sharing Plan allocations
- Supplemental unemployment payments received in addition, but not including, Unemployment Insurance payments
- Disability Benefits received from Canada Pension Plan (CPP) or Quebec Pension Plan (QPP)
- Tips and gratuities
- Possibly disability payments received from an employer sponsored plan, provided the payments are reported as taxable income
Keep in mind that Canada Revenue Agency has certain guidelines governing assets deposited into a registered account. In general, if the investment deposited into an SDRSP has a capital gain associated with it, then even though the investment is now owned by your SDRSP, it will deem to have been sold thereby triggering a taxable capital gain. If on the other hand the deposited/transferred asset has a capital loss associated with it, the loss will not be recognized by Canada Revenue Agency and it cannot be used to offset past, current nor future taxable capital gains. The tax benefit of a capital loss will be lost if the loss results from the deposit of the investment into an SDRIF account.
Before depositing to your SDRSP “in Kind”, you should understand the income tax considerations and ensure that this type of contribution makes sense.
Note: For more detailed information on RRSP Contributions, visit the FAQ section.