The Registered Retirement Savings Plan is one of the most effective retirement and tax planning tools made available by the Canadian government. Your contributions into a RRSP count as a deduction against your taxable income, and the interest earned on investment inside the RRSP is not taxable. You pay tax only when you start making withdrawals, preferably during retirement when your income is lower and your tax rates have come down as a result. The government allows RRSP contributions up to certain limits, so it is important to know your maximum contribution limit in order to avoid paying penalties for over-contributing.
Determine your earned income for the preceding year. Use the chart in the Canada Revenue Agency guide, "RRSPs and Other Registered Plans for Retirement" on page 12 (see Resources).
Multiply your earned income amount by 18 percent.
Find out the maximum contribution dollar limit for your contribution year. The Canada Revenue Agency website publishes that amount for each new year (see Resources). In 2010, that amount stands at $22,000.
Take the lower of 18 percent of your earned income and the RRSP maximum contribution limit.
Add the RRSP contribution room shown on line (A) of your previous year's Notice of Tax Assessment. RRSP rules allow you to carry forward any unused contribution room for all previous years going back to 1991.
Subtract any RRSP contributions you made last year.