The maximum RRSP contribution amount that can be deducted is called the “RRSP deduction limit”. It is also referred to as your “contribution room” or “deduction room”. Your deduction limit is found on your Notice of Assessment or Notice of Reassessment that you receive each year after you file your tax return from Canada Revenue Agency.

Your 2010 limit would be on your 2009 Notice. The deduction limit is calculated as:

(1) 18% of “earned income” for the preceding year, to an annual maximum (see following table)

(2) less the “pension adjustment” amount, for participants in a Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP)

(3) less any “past service pension adjustment”, for participants in a RPP or DPSP

(4) plus any “past service pension adjustment” reversals

(5) plus unused deduction room carried forward from the previous year

The annual limits for RRSPs, money purchase (defined contribution) RPPs and defined benefit RPPs are:

The DPSP limit is 1/2 of the MP limit each year. The MP limit and DPSP limits for pension adjustment (PA) purposes are also restricted to 18% of compensation.

For each year after 2009 for RPPs and 2010 for RRSPs, the limits will be indexed for inflation using the Industrial Aggregate average wages and salaries in Canada.

RRSP limits lag behind RPP limits by one year because RRSP limits are based on prior-year earnings, and RPP limits are based on current-year earnings.

Mounir R. El-Ayari, CIM, FCSI, C.h. P. Strategic Wealth
Investment Advisor
Associate Portfolio Manager
e-mail: mounir.el-ayari@nbf.ca

This Information Was Provided By TaxTips.ca

You will be able to put an extra $1,000 into your RRSP for 2009 if your earned income for 2008 is at least $116,667. Each January the maximum dollar limit goes up by $1,000 under a multi-year schedule that runs to 2010. After that, plans call for the top limit to be indexed to growth in the average national wage. The top limit for 2008 is $20,000 and $21,000 for 2009. This means those with earnings of about two and a half times the average wage can save for retirement on a fully tax-sheltered basis. The annual $1,000 increase only affects the RRSP ceiling. Your RRSP limit is still based on 18% of earned income for the prior year, minus the “pension adjustment” reported by your employer on your T4 tax slip if you belong to a pension plan or deferred profit sharing plan.

What Is Earned Income?

Earned income includes salary, employee profit-sharing income, business income, rental income and taxable alimony/maintenance payments. Disability pensions from the Canada Pension Plan or Quebec Pension Plan count too, but not regular CPP or QPP retirement benefits. Earned income for RRSP purposes is then reduced by business losses, rental losses, union dues, tax-deductible employment expenses and any deductible alimony/maintenance you’ve paid. If you contribute at the start of the year, see the RRSP Deduction Limit Worksheet in Canada Revenue Agency publication T4040, available at www.cra-arc.gc.ca. If you contribute later in the year or monthly, you can wait for the CRA to calculate your limit from the numbers on your 2008 tax return due by April 30. This will then be reported in the Notice of Assessment sent after your tax return has been processed. If you own an incorporated business, you might wish to have your accountant review how much compensation you take as salary and bonus, and how much as dividends. Salary and bonus create RRSP room; dividends do not.

Mounir R. El-Ayari, CIM, FCSI, C.h. P. Strategic Wealth
Investment Advisor
Associate Portfolio Manager
e-mail: mounir.el-ayari@nbf.ca

The TFSA is a flexible and tax-efficient savings tool that can complement your existing RRSP, as well as playing a very important role in your overall planning process.

All taxpayers aged 18 or older will begin to accumulate $5,000 of TFSA contribution room per year beginning in 2009, regardless of their earned income. As with an RRSP, the cash deposited into a TFSA can be used to purchase a wide variety of different investments (in fact the list of eligible investments for the two accounts is substantially the same). And most important, as the program’s name suggests, investment income and capital gains earned on the cash you contribute to your TFSA accumulate entirely tax-free.

You don`t get a tax deduction for contributing to a TFSA, however, but you can make TFSA withdrawals at any time and for any amount, without having to pay tax. Even better, the dollar value of your withdrawal is added to your next year’s contribution room, giving you complete flexibility in terms of planning your TFSA inflows and outflows. Of course the TFSA will be a powerful new tool for retirement planning. But that’s not all – the TFSA`s versatility allows it to be used as a savings vehicle for a variety of different goals, as a tool to pass assets on to the next generation, as a way of splitting income between two spouses, and much more.

As a result of all of these attractive features the TFSA should be part of any sound long-term financial plan.

Mounir R. El-Ayari, CIM, FCSI, C.h. P. Strategic Wealth
Investment Advisor
Associate Portfolio Manager
e-mail: mounir.el-ayari@nbf.ca

What Are IPPs?

Individual Pension Plans (IPPs) are employer-sponsored Defined Benefit (DB) pension plans that usually only have one member. A spouse can also be included as a plan member, if he or she is also an employee of the same sponsoring company. IPPs can be an appropriate retirement investment vehicle for self-employed professionals, business owners, or executives, as long as the plan member is an employee of the sponsoring company. The tax advantages are maximized for individuals over 40 years of age who earn significant employment income and who want to tax-shelter more money than permitted by RRSPs.

How They Work

Using a customized model, IPPs can be set up for eligible individuals. As required by and subject to pension legislation, a Statement of Investment Policy and Procedures (SIP&P) is drafted that outlines how the pension funds will be managed. With any DB pension plan, the pension income is calculated according to a formula based on a number of factors, such as years of service and salary levels. The employer is fully responsible for providing this guaranteed income, regardless of the investment climate. As a DB pension plan, the IPP must provide a lifetime retirement pension for the employee. An actuary engaged by the sponsoring company will determine the contributions required in order to fund the promised pension benefit. This actuarial valuation must be completed at least once every three years (once every 4 years in certain jurisdictions). When IPP participant retires and or at age 65, additional contributions can be made to the IPP to fund some retirement benefits. Depending on the actual retirement age, the funding of these benefits may help to reduce any surplus in the IPP or allow for additional tax-deductible contributions to the IPP. Pension benefits become “locked-in” in most jurisdictions, and legislation requires that locked-in money be directed in such a way that maintains an income stream for the individual’s retirement years. Pension benefits can be paid directly from the IPP funds. Alternatively, if the IPP is terminated, the IPP funds may be transferred to a Locked-In Retirement Account (LIRA) – or in some cases, to an RRSP – to accumulate until age 71, or used to purchase an annuity.

Mounir R. El-Ayari, CIM, FCSI, C.h. P. Strategic Wealth

Investment Advisor
Associate Portfolio Manager
e-mail: mounir.el-ayari@nbf.ca