| 19(1) | File No. 900611/900783 |
| D. Duff | |
| (613) 957-3498 |
June 5, 1990
19(1)
This is in response to your letters of April 27 and May 7, 1990, and further to the telephone conversation (19(1)/Duff) of May 28, 1990, regarding contributions to Registered Retirement Savings Plans (R.R.S.P.s) and pension plans by members of the 24(1)
The rules governing contributions to R.R.S.P.s are to be revised effective for 1991. The current rules generally restrict such contributions for employed taxpayers who are, or may become, entitled to benefits under a pension plan as a result of the employer's contributions. In such cases, the R.R.S.P. contributions are restricted to the amount by which the lesser of $3,500 and 20% of his earned income exceeds the taxpayer's contributions to a Registered Pension Plan. If the above restriction does not apply the taxpayer can contribute an amount equal to the lesser of $7,500 and 20% of his earned income.
One of the criteria a pension plan must meet to be registered is that the employer must make contributions. Therefore any member of a Registered Pension Plan will be subject to the aforementioned restriction. Members of unregistered pension plans will also be restricted if the employer makes contributions to such plans. In the situation described by you, it would be a question of fact whether the employer is making contributions or is simply forwarding amounts withheld from the employee.
Regarding the example given in your letter of May 7, 1990, we will restrict our comments to the deductions permitted for contributions to a R.R.S.P. Of your two examples of the present system, the maximum R.R.S.P. deduction in the first one, where there is no pension, is correct. The deduction is limited to the lesser of 20% of income and $7,500. In the second example, where the employer is contributing to a pension plan, the R.R.S.P. deduction would be restricted to $3,500 less the employee's contributions to a Registered Pension Plan. In your example the $1,429 is contributed by the employer and should not be deducted from the $3,500 to obtain the maximum R.R.S.P. contribution.
Under proposed legislation, which is to be effective for 1991, the amount of taxpayers' R.R.S.P. contributions will be restricted to a newly defined "R.R.S.P. deduction limit". Generally, this will be equal to the amount by which the lesser of the "R.R.S.P. dollar limit" and 18% of earned income of the preceding year exceeds the taxpayer's pension adjustment (P.A.) for the preceding year. The P.A. will be nil for taxpayers who are not members of a Registered Pension Plan or a Deferred Profit Sharing Plan, consequently they could make contributions up to the lesser of the above two amounts. The P.A. is basically a measure of the benefits credited to a member of a Registered Pension Plan or Deferred Profit Sharing Plan. The R.R.S.P. dollar limit will be $11,500 for 1991, and will increase by $1,000 for each year to 1995 after which it will be indexed.
In your examples of the proposed system, the maximum R.R.S.P. deduction in the first case, where there is no pension, will be the lesser of 18% of the earned income of the preceding year and $11,500, for 1991. The maximum R.R.S.P. deduction is correct if the $30,000 was earned in the preceding year. As there is no Registered Pension Plan there is no P.A. to be deducted from this amount.
Your second example contains some errors. The relevant amounts are 18% of the earned income of the preceding year and the R.R.S.P. dollar limit ($11,500 for 1991). The P.A., also of the preceding year, is deducted from the lesser of these two amounts, to get the R.R.S.P. deduction limit. Assuming the pension is a Registered Pension Plan and a Money Purchase Plan the P.A. is generally the total of the contributions made by both the employer and employee.
Also, we would like to point out that, within certain limits, unused R.R.S.P. deduction room can be carried forward and used in subsequent years.
We trust these comments will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate