Earned income key to purchasing RRSPs



Forget about paying for your child’s education with your RRSPs.


Q: I am the owner/manager of a corporation. Every year, I am generally paid a salary. In 2005, sales were down and I took a dividend at the end of the year instead of a monthly salary. My only source of income was the dividend and a small gain on some stocks. This year, I drew a salary and declared a large bonus. However, I am told that I am not allowed to contribute to a Registered Retirement Savings Plan (RRSP) for 2006. If I don’t, I will have a huge tax bill. How can I check this?


A: For many individuals, contributions to an RRSP offer the only tax relief that is available to the average taxpayer. Many individuals would like to contribute but don’t have the money, some have the money but do not qualify.

With the holiday season behind us, many taxpayers are thinking about ways to save on their income taxes or get a larger tax refund. The financial institutions are hoping that you invest your RRSP money with them.

Obtain a copy of your 2005 tax assessment. It will specify your RRSP contribution limit allowed for the year. Your contribution amounts are made up of current contributions based on the prior year’s earned income plus unused contribution room from prior years. Individuals with no income in 2005 should check their 2005 tax assessment for unused contribution room available.

An individual’s RRSP contribution limit is 18 per cent of his/her prior year’s earned income to a maximum (for 2006) of $18,000. The maximum annual contribution will continue to increase $1,000 per year to 2010 as follows:

  • 2005: $16,500

  • 2006: $18,000

  • 2007: $19,000

  • 2008: $20,000

  • 2009: $21,000

  • 2010: $22,000

Your 2006 current RRSP contribution limits are based on 2005 earned income dividends; capital gains are not considered earned income for RRSP calculation purposes.

Earned income is defined as:

  • Employment income

  • Net income from self-employment or partnership

  • Royalties

  • Net rental income (less rental losses)

  • Research grants

  • Alimony or separation allowance (less deductible alimony payments)

  • Disability benefits under CPP

  • Employee profit sharing plan allocations

The following are not considered earned income:

  • Investment income such as dividends and interest


  • Taxable capital gains

  • Pension income

  • Death benefits

  • Scholarships and bursaries

  • Business income from limited partnership

Tax planning is vital and should be done in advance of the current tax deadline.

Q: My son is attending university. Can I withdraw $20,000 of my RRSP under the Lifelong Learning Plan to pay for his education?

A: The Lifelong Learning Plan (LLP) is a wonderful program that allows taxpayers to withdraw money from their RRSPs for educational purposes. Unfortunately, the money may not be withdrawn from your RRSP for your son’s use. Withdrawals can be used for a qualifying full-time education and training by you, your spouse or common-law partner.

Under the LLP, an individual may withdraw from their RRSP up to $10,000 in a year, to a maximum of $20,000 over a four-year period.

You should look at other available options.

Henry Choo Chong, CGA provides accounting and tax services to individuals and businesses in the GTA. He can be reached at 416-590-1728, ext. 304. Any questions to Money Matters should be e-mailed to choochonghcga@yahoo.ca.