RRSP limits set to change in the 1991 taxation year.

RRSP limits set to change in the 1991 taxation year

In May 1985 significant changes were proposed to the rules governing registered retirement savings plans (RRSPs) and registered pension plans (RPPs). The new tax rules have finally been enacted into law.

This article will deal with the calculation of amounts of permitted RRSP contributions by employed individuals starting in 1991.

For 1991 an employee who is not a member of an RPP may contribute 18 per cent of his or her 1990 earned income (generally wages) to a maximum of $11,500. The current year contribution is based on the prior year's earned income.

For an employee who earned $50,000 in 1990, the maximum RRSP contribution in 1991 is $9,000 (18 per cent of $50,000).

For employees who are members of a pension plan the rules are far more complex. The basic rule in determining a taxpayer's RRSP contribution (referred to now as "contribution room") is the limit described above reduced by a pension adjustment. While this sounds fairly simple the fine-tuning and reporting required from employers is horrendous, especially when defined benefit plans are involved.

Consider the example of an employee who earns $50,000 and the pension is two per cent of average earnings over the last three years of employment for each year of service up to 35 years. Assume further that the pension is reduced at age 65 by the amount of Canada Pension Plan benefits.

This particular employee may contribute $2,858 to his or her 1991 RRSP (see graph).

An employee with a similar pension who earns $30,000 to $40,000 could also contribute $2,858. This amount would vary, however, if the pension benefits were calculated based on different benefit provisions in different pension plans.

Employers, when completing the T4 slips, must provide information to Revenue Canada relating to the pension adjustment. Revenue Canada will then consolidate all T4 slips issued to particular employees and report the RRSP contribution room to those people in late 1991.

There are also additional complex rules regarding carry-forward amounts, past service amounts, reporting requirements by employers to Revenue Canada, Revenue Canada's reporting requirements to affected employees, and on and on and on.

Employers and interested employees would do well to obtain Revenue Canada's pension adjustment calculation guide and various other publications now appearing in the market to explain these complex rules.

Employers with pension plans should also remember their obligation to report pension information to Revenue Canada and their employees at "T4 time" in February 1991.

Calculation of 1991 RRSP contribution for an employee earning $50,000 and contributing 2% of earnings to a pension

The regular RRSP limit (18% of $50,000) = $9,000

The CPP offset is 1/35 of 25% x $28,900 (25% is estimated pension and $28,900 is the 1990 CPP yearly maximum pensionable

earnings)                                   = $206.43
The benefit accrual (2% x $50,000-$206)     = $739.57

The pension adjustment (9 x $793 - $1,000) = $6,142.00

The contribution room ($9,000 - $6,142) = $2,858.00

Rick Lindquist is a senior manager with Peat Marwick Thorne in Sudbury.