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Legislation complicates RRSP limits.

Legislation complicates RRSP limits

The long-awaited income tax legislation dealing with tax-assisted retirement savings was passed into law on June 27. This new law contained some significant changes to the registered retirement savings plan (RRSP) rules that taxpayers have become accustomed to.

The RRSP contribution limits for 1990 are generally the same as they were for 1989. Employees who are members of a pension plan can contribute the lesser of $3,500 or 20 per cent of earned income, less any contributions made to their pension plan.

Self-employed individuals or employees who are not members of pension plans can contribute the lesser of $7,500 or 20 per cent of earned income.

In contrast to 1989, earned income for 1990 and future taxation years no longer includes pension or superannuation benefits, retirement allowances or death benefits.

Starting in the fall of 1991, Revenue Canada will be advising all taxpayers of what their individual RRSP contribution limits are. The new rules will also allow for any unused RRSP contributions to be carried forward seven years.

Due to the complex changes being introduced, commencing in 1991 employees who are members of pension plans will find it extremely difficult to estimate their RRSP limits. Employers will be analyzing their pension plans, making calculations and reporting this information to Revenue Canada, which will then determine what each individual's contribution limit is.

Self-employed individuals and employees who are not members of pension plans can attempt to estimate their contribution limits. The limits will be increasing annually in $1,000 amounts from $11,500 in 1991 to $15,500 in 1995, subject to a limit of 18 per cent of the preceding year's earned income.

The new rules have provided some transitional relief, permitting you to contribute a maximum of $6,000 annually of your pension or superannuation benefits to your spouse's RRSP until 1994.

To be deductible, your RRSP contribution must be made within 60 days of the end of the year (generally by March 1 of the following year). While many Canadians make their RRSP contributions on the last possible day, you should consider making the contribution earlier, thereby maximizing the benefits of earning tax-sheltered income.

For example, if you had contributed early in 1990, all of the interest earned so far would have accumulated tax-free in the RRSP. Waiting until March 1 will subject any income earned prior to your contribution to immediate taxation.

The impact of making early contributions to an RRSP can be dramatic. However, when making early contributions, make sure you do not over-contribute.

Michael J. Franko is a senior manager of tax at the Peat Marwick Thorne office in Sudbury.
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Title Annotation:Finance...; registered retirement savings plans
Author:Franko, Michael J.
Publication:Northern Ontario Business
Date:Oct 1, 1990
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