RRSP Deduction Limit Vs Contribution Limit

RRSP deduction vs contribution limit with examples

With over 6 million contributors in 2018, Registered Retirement Savings Plan (RRSP) is a popular registered account for Canadians. But there are still some RRSP misconceptions.

One of them is the confusion about RRSP deduction limit and contribution limit. You may have noticed the 2 numbers on your notice of assessment and wondering what they mean.

In this post, we’ll cover the difference between the 2 limits (with examples) and learn where to get the numbers.

What is RRSP Deduction Limit?

RRSP deduction limit is the maximum amount that you can deduct from your tax returns to lower your tax for the year.

It is 18% of your previous year’s earned income up to the annual RRSP dollar limit ($27,830 for 2021), plus any unused deduction room from the prior year less pension adjustments (if you have a registered plan from your employer).

The RRSP dollar limit is set by CRA and changes annually. For example, the RRSP dollar limit for 2020 was $27,230 but it was increased by $500 for 2021.

For 2021, the RRSP deduction limit is:

  • 18% of your 2020 earned income up to a maximum of $27,830
  • Plus the unused deduction room at the end of 2020
  • Less any pension adjustments

For example: if your earned income for 2020 was $100,000 and you’ve always maxed out your contributions and deductions, your deduction limit for 2021 will be $18,000.

You’ll need to have an earned income of about $154,600 in 2020 to deduct the 2021 RRSP dollar limit of $27,830.

What is RRSP Contribution Limit?

RRSP contribution limit, otherwise known as available contribution room, is simply the maximum amount you can contribute to your RRSP account during the RRSP contribution year.

In general, you’ll have to pay a 1% per month penalty if you go above this limit by more than $2,000. The penalty will continue until the excess amount is eliminated.

So how do you calculate RRSP contribution room or limit?

It is calculated in a similar way as RRSP deduction limit.

That is, the lower of 18% of your income from the previous year minus pension adjustments, plus any available contribution room at the end of the preceding year.

Related Post: RRSP Contribution Year (How it affects RRSP Deadline)

RRSP Deduction Limit Vs Contribution Limit

In simple terms, your RRSP contribution limit is how much you can contribute to all your RRSP accounts in a year. While the RRSP deduction limit is how much you can deduct from your tax returns to reduce your total tax liability for the year.

These two numbers will be the same for most people. But if you’ve made any contributions in a previous year and deferred the tax deduction to the future, you’ll have an unused RRSP contribution.

A simple illustration:

You contributed $20,000 to your RRSP during the 2020 contribution year. However, you only deducted $5,000 from your tax return for 2020 because you anticipate that your 2021 income will be much higher.

The difference of $15,000 is your unused RRSP contribution and you’ll see how it affects your limits for 2021 in the next section.

Also, you can check this post for a detailed guide on what an unused RRSP contribution is and how it affects how much you can contribute to your RRSP.

Here’s the relationship between the 2 limits:

RRSP Deduction Limit = Unused RRSP contributions + RRSP Contribution Limit (Available contribution room)

So if there are no unused RRSP contributions, your deduction and contribution limits will be the same. Like in the sample NOA below:

sample notice of assessment showing RRSP deduction and contribution limits

RRSP Deduction Limit Vs Contribution Limit: Example

Still confused? Check the example below to illustrate the differences.

Jane has always maxed out her RRSP contribution room and claimed the deductions in her tax returns.

Her earned income for 2018 was $120,000. With no unused amounts from previous years, the maximum she can contribute and deduct for 2019 was $21,600 (18% of her income).

Like previous years, Jane contributed the full amount to her RRSP and used the contribution to lower her tax for 2019.

For 2019, she made a total of $100,000 as earned income so her contribution limit for 2020 was $18,000. Again, she contributed $16,000 but didn’t quite max out her contribution room for the year.

But things got a little interesting…

Though she made $110,000 in 2020, Jane believes her income will be substantially higher in the coming years.

So when it was time to file the 2020 tax returns, she decided to claim just $5,000 as RRSP deduction.

Now let’s look at her limits at the end of each year starting:

Illustration of how the contribution room and deduction limit will be calculated.

2019

The RRSP amounts for 2019 will be determined using the 2018 earned income. And we know she did not have any carried forward RRSP amount, so things are more straightforward.

Since she used the full amount of her contribution of $21,600 on her tax return, there was no unused RRSP contribution.

Therefore, her RRSP deduction limit will be the same as the RRSP contribution limit when she receives her notice of assessment (NOA) for 2019.

2020

Let’s start with the contribution limit…

Remember you can carry forward any unused contribution room. So the difference between her contribution limit for the year and what she managed to contribute will be carried forward to 2021 – i.e. $2,000.

Also, by contributing $16,000 but deducting only $5,000, Jane will have an unused RRSP contribution of $11,000 to be used in the future.

Add the 2 figures, and we get $13,000 as the RRSP deduction limit at the end of 2020. This is the same as taking the $18,000 deduction limit for 2020 and subtracting the $5,000 she deducted.

Therefore, the 2021 deduction limit on her NOA will show $13,000 plus 18% of 2020 income ($18,000) for a total of $31,000.

Getting your RRSP Limits from CRA

You can try to calculate your deduction and contribution limits yourself – but the quickest and probably the most accurate way is to check your account with CRA.

Be careful though.

The number you see when you login to your account is your deduction limit. Again, it will be the same for most people.

If you’ve never deferred any RRSP contributions in the past, you can simply use that number to determine how much to put in your RRSP accounts for the year.

To get your RRSP contribution limit though, you’ll need to retrieve your last notice of assessment or notice of reassessment from the mailbox in your CRA’s account.

You will find both the deduction limit and available contribution room in the RRSP Deduction Limit Statement section.

Alternatively, go to the RRSP and TFSA section on the overview page of your CRA account. You’ll find historical information about your RRSP deduction limit, available contribution room and any unused RRSP contributions.

And if you don’t mind calling, use the CRA’s Tax Information Phone Service (TIPS) by calling 1-800-267-6999.

Conclusion

Understanding the difference between your RRSP deduction limit and contribution room can save you from unnecessary RRSP penalties.

To summarize, both limits will be the same if you’ve always claimed all the RRSP contributions you’ve made. If you’re not sure, it’s best to check your NOA or place a call to CRA.

If you liked this post about RRSP deduction limit vs contribution limit, check out the other ones below.

Let me know in the comments if you have any questions.

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Simon is a CPA by day and a Personal Finance Blogger by night. With over a decade experience in financial services, he's passionate about personal finance, investing and helping people take control of their financial life.

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