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The Definition of Earned Income
Your RSP contribution limit is based on earned income for the previous year. As shown below, that involves more than regular salary.
For example, net rental income counts. So do alimony payments received. Perhaps you are paid a director’s fee for serving on the board of your condominium or a family business. That’s included too as "net income from an office." Note, though, that you cannot include pension income, interest, capital gains, dividends or distributions from limited partnerships.
ADD:
- Net income from an office or employment
- Net income from self-employment
- Employee profit-sharing plan allocations
- Disability benefits received from the Canada or Quebec Pension Plan
- Supplementary unemployment benefits – not regular EI benefits
- Royalties from any work or invention you created
- Research grants, net of certain related expenses
- Net rental income from real property
- Canadian-source business or employment income earned while non-resident
- Alimony and maintenance payments received
SUBTRACT:
- Union and professional dues, and deductible employment-related expenses
- Refunds of salary, wages and research grants
- Current-year net rental losses on real property
- Current-year losses from running a business
- Deductible alimony and maintenance payments.
Be aware that everyone who reports earned income generates RSP contribution
room. Perhaps your young children earn money from delivering newspapers,
mowing lawns or baby-sitting. Or, your teenager might have a regular part-time
job. Have the child file a basic tax return reporting that income. It’s unlikely
that he or she earns enough to owe any tax. Even so, the tax department
will allocate RSP room. That means your child can have an RSP and his or her
savings can start compounding on a tax-deferred basis. Consider that $100
invested at age 15 and compounding on a tax-deferred basis would be worth
almost $2,000 at age 65, assuming 6% average annual growth. If the child
owes no tax now, there’s no point in claiming a tax deduction for the contribution.
Instead, the child can put the money into the RSP now, but wait to
claim the deduction until he or she earns enough for it to generate meaningful
tax savings. That’s handled by filing Schedule 7 with the child’s tax return.
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