One of the limitations on making deductible contributions to a small is your “earned income” for the preceding taxation year. Basically, the calculation of your contribution limit for the current year begins with the lesser of the set dollar amount for the year ($24,930 for 2015) and 18% of your earned income for the preceding year. Unused RRSP room from previous years will add to your current year’s room. If you are a member of a registered pension plan, your RRSP room will be reduced by your “pension adjustment” for the preceding year.
For RRSP purposes, “earned income” includes
- Net income from employment,
- Net income from business, including from a partnership,
- Net rental income from real estate,
- Canada Pension Plan or Quebec Pension Plan disability pensions, and
- Spousal support payments include in your income;
- Losses from businesses and rental real estate, and
- Deductible spousal support paid by you.
(There are certain other components to earned income as well.)
Significantly, earned income does not include most forms of passive investment income, such as interest, dividends, and capital gains.
In most cases, there isn’t much you can do in terms of maximizing your earned income for these purposes. However, if you own a corporation in which you are an employee, there is some flexibility in this regard. You can decide on any mix of dividends or salary to be paid to you in a particular year. The salary will be earned income for RRSP purposes, while the dividends are not. Of course there may be other reasons for choosing dividends, so the RRSP deduction rule should not be your only consideration.