A RRSP tax deduction guide for Canadian investors
Whether you’re nearing retirement or just starting your career, the Registered Retirement Savings Plan (RRSP) is an important investment vehicle for many Canadians. That’s because putting money into an RRSP doesn’t just help you save for the future, it can also reduce the amount of income tax you’ll pay.
To make the most of your RRSP, here are some key benefits and rules to keep in mind.
Benefits of contributing to an RRSP
An RRSP is an investment account. Any contributions you make to the account not only help you grow your savings for the future but can also help you to reduce your taxable income. Let’s dive into five key benefits.
- Tax deductibility: The money you contribute to your RRSP is tax-deductible, which means the amount you contribute reduces your taxable income. For instance, if you have income of $120,000 and contribute $20,000 to your RRSP, your taxable income will fall to $100,000. Most people pay tax in advance off each paycheque, so if you lower your taxable income, you could end up receiving a refund when you file your taxes – that is, the Canada Revenue Agency (CRA) will give you back some of the money you already paid in taxes. Check out this income tax calculator to see how RRSP contributions can help reduce your taxable income.
- Tax-deferred growth: Another key advantage of the RRSP is that you don’t pay tax on any income earned within the account until it’s withdrawn. Ideally, you won’t be withdrawing that money until you’re retired, when you will likely be in a lower tax bracket. The earlier you start contributing to an RRSP, the longer you have to potentially benefit from tax-deferred compounding growth. One of the ways you may consider to invest your money over time is to build an investment portfolio using ETFs and mutual funds. Check out this investment growth calculator to see how your investments could multiply over time.
- Contribution options: Unused RRSP contribution room can be carried forward for use in future years. If you are unable to maximize your contributions in some years, you can use that room in future years. Carrying forward contributions can also help maximize your tax savings if you do it strategically to reduce your taxable income in a higher tax bracket.
- Spousal RRSPs: Married or common-law couples can qualify for a spousal RRSP, which allows one partner to use their own RRSP contribution room to contribute to the other partner’s RRSP. The person contributing to the spousal RRSP receives the tax deduction, but the plan is in the non-contributing spouse’s name. In this type of arrangement, the higher-income spouse invests in the lower-income spouse’s RRSP – and withdrawals would be taxed in the latter’s hands – to balance their income and reduce their household tax bill. Spousal RRSPs can also be used for income splitting in retirement, which can also help lower a couple’s overall tax bill.
- Help pay for a home or school: Even though retirement is right in the name, an RRSP has other uses as well. For instance, you can use your RRSP savings to buy a home through the Home Buyers’ Plan (HBP), or return to school using the Lifelong Learning Plan (LLP). Under the HBP, you can make a withdrawal of up to $60,000 individually and $120,000 for couples (if eligible) from your RRSP to buy or build a home, and you don’t have to pay tax on that money so long as it’s returned to the account within 15 years. Similarly, the LLP allows you to withdraw up to $10,000 in a calendar year from your RRSP to finance full-time training or education for you or your spouse or common-law partner (but not your children), based on certain conditions. The maximum withdrawal under the LLP is $20,000.
Understanding your deduction limit
The RRSP contribution room and deduction limit are often used interchangeably. The contribution room is a cap on the amount of money you can contribute to an RRSP each year.
The deduction limit is the maximum amount you can deduct from your taxable income for RRSP contributions in a given year. Both are calculated as the lesser of 18% of your income from the previous year or the annual limit set by the CRA, plus any unused contribution room carried forward from previous years. We will use contribution room to refer to this number in this article.
For example, if you made $100,000 in 2024, your earned contribution room for 2025 is $18,000 (18% of $100,000). The RRSP contribution limit for 2025 is $32,490. Since your 2024 earned income is less than the RRSP contribution limit, your contribution room is $18,000, plus any unused contribution room carried forward from previous years.
It’s important to monitor your contribution room to ensure you don’t exceed the allowable amount, since overcontributing can result in penalties. Generally, you have to pay a tax of 1% per month on any portion of your contributions that exceed your contribution room by more than $2,000.
Your contribution room can be found on your latest notice of assessment or by accessing your CRA My Account online. You can also consult your financial advisor to ensure you have the most up-to-date information.
The bottom line
An RRSP is one of the best ways of investing for your retirement. Not only can you generate tax-deferred growth in your portfolio over time, but you could save money for this tax season. But before you contribute, know your contribution room to avoid unnecessary penalties.
If you’re looking for additional ways to optimize your RRSP, check out these six tips to make the most of your RRSPs. Talk to an advisor to figure out an RRSP investment strategy that meets your unique financial needs and goals. If contributions were made to the spousal RRSP in the current year or the previous two years, any withdrawals may be taxed as income for the contributing partner instead of the spouse. This “three-year attribution rule” is designed to prevent short-term tax avoidance. It is important to note that if you are over the age of 71 but your spouse is under the age of 71, you can still contribute to a spousal RRSP as long as you have contribution room.
