Your child’s paper routes, babysitting jobs and the neighborhood lawn-mowing work can do more than provide them with spending money and a good work ethic – it also starts building for their retirement.
“One of the best reasons to start creating RRSP contribution room early is so that you’ll be able to shelter some income with an RRSP contribution and claim the associated deduction when you do have income in higher tax brackets,” says Joel Campagna, CPA, CMA, of Manulife in Kitchener. “Earned income in the previous year(s) has an impact on your RRSP-contribution room, but there is no minimal contribution required to any plan. If you’re earning income, you’re creating contribution room.
“Filing a tax return lets the Canada Revenue Agency (CRA) know how much earned income you had in a given taxation year, and how much potential RRSP room you may have,” he adds. “There is no age minimum for filing a tax return, but you must have a Social Insurance Number (SIN).”
A current year’s RRSP-contribution room is based on 18 per cent of your prior year’s earned income, to a maximum of $24,930 in 2015 and $25,370 in 2016.
Earned income is your gross salary, business or self-employment income, net rental income from real estate, any taxable spousal support and child support received, and any disability pension amounts from the Canada or Quebec Pension Plans. Common additions and deductions would include deductible spousal support and employment expenses, such as union dues, net business losses and rental losses.
Some types of income do not qualify as earned income for RRSP contribution room calculations. Examples are interest income, dividends, capital gains, pension benefits, retiring allowances, and income or death benefits from an RRSP or RRIF.
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