We’re going to work through a question where we’ll determine earned income for RRSP contribution room purposes. Now, calculating RRSP contribution room is a concept that could pop up on pretty much any financial services exam you could ever write in your career, so it’s worth learning well the first time.
If you added the full suite of key concept videos to your student account, you have access to a mini lesson on this concept that will touch on the subtle nuances that could impact the math. It’s also a concept that becomes easier with practice. So keep working through our exam preparation questions, and pay special attention to the detailed answer keys.
For this video, I’ve selected a somewhat easy question, but it’s one that many students make a very common mistake on. And if a student makes this mistake they’re already off track, and there’s virtually no chance they will arrive at the right answer. So I wanted to cover a simple question that focused squarely on this concept.
Let me start with a story about a group of hardworking friends. It’s Friday evening, and they’re getting together for a drink to celebrate the end of another work week. Matt works construction. Patty works a desk job that is highly stressful. Carl works at a hospital in the emergency department. And Paulo, well, Paulo just got back from the Caribbean and pretty much lives off his investment portfolio he earned at the age of 30.
Could you imagine if Paulo pipes up, “I worked really hard this week and earned more than $10,000 in investment income.” He’ll likely get a few eye rolls and hear something like, “You didn’t earn that income, Paulo, your investment portfolio did. You can hardly call that earned income.” His friends make a good point, don’t they? Canada Revenue Agency certainly agrees.
So here is the only, but extremely important, nugget of knowledge that I’m going to share in this video. While investment income may be taxable, it is not considered earned income for RRSP calculation purposes, and neither is pension income. Paulo’s friends are right. Think of it this way; you don’t earn investment income or pension income, your portfolio does.
With all this in mind, let’s circle back and tackle the question. Employment income, net rental income, and net business income are all considered earned income for RRSP calculation purposes. So is alimony received, since the source of that money is the payer spouses earned income. However, investment income and pension income are not.
So to calculate Mindy’s earned income for RRSP purposes, we ignore the investment income and the pension income, and add up the following. $80,000 employment income, plus $12,000 in net rental income, plus $15,000 net of expenses business income, and arrive at an answer of $107,000 earned income. Let’s select that answer, and we’re correct.
Now, depending on the question you’re being asked, you may be asked to take the math further and determine RRSP contribution room, where there are other nuggets of knowledge that may come into play. Such as what years earned income do you use, how do you deal with pension adjustments, et cetera.
We didn’t cover all that in this video because the purpose was to make sure you got this one very important learning point under your belt. But the work doesn’t stop there. Be sure to keep reading the study guide and working through our exam preparation questions, soaking up all those nuggets of knowledge along the way. And if you added the full suite of e-learning videos to your student account, don’t forget to watch those too.