RRSP Tax Tips:
CRA reference:
https://solidtax.ca/wp-content/uploads/2022/09/t4040-21e-RRSP.pdf
Know your RRSP deduction limits
Don’t overcontribute to RRSP. The penalty for RRSP over-contributions is 1 percent per month for each month you are over the limit.
You can find your RRSP deduction limit by checking your CRA my account. You can also find it on your latest notice of assessment or notice of reassessment letter.
Know your marginal tax rate
It is all about tax rates, and this is how much you are getting taxed on. It also affects your RRSP contribution and deduction rate. The higher your income is, the higher your marginal tax rate is, and the more tax you can save by contributing to an RRSP.
Your tax saving = Your marginal tax rate x Your RRSP contribution
RRSP tax tips: Advantages
Tax saving
The most common advantage to RRSP is saving money on your taxes. If you have taxes to pay, your RRSP contributions can reduce the amount of tax you pay. RRSP contributions can also increase the refund you get.
Your tax saving rate is your marginal tax rate applied to your RRSP contributions during the year, so the higher your income is, the higher your marginal tax rate is, and the more tax you can save by contributing to an RRSP.
RRSPs grow tax free
This RRSP tax benefit may not bring you much saving in the short term. However, if you look over it in the long-term, you can see how powerful it can be.
Income splitting opportunity with spousal RRSP
Basically, any amount that you are eligible to contribute to your own RRSP may be directed instead to a spousal RRSP. The benefits of this strategy are exceptional:
- A spousal RRSP essentially shifts retirement income into the hands of the lower tax-bracket spouse.
- When you contribute to a spousal RRSP, the plan and plan assets are owned and controlled by your spouse. However, you get to personally lower your taxable income by the amount you contribute.
It may increase your other benefits
It is not widely known that you may get more government benefits by contributing to RRSP.
An RRSP tax deduction will reduce your net income, which is shown on line 236 of your tax return. Your net income is used in calculating eligibility for income-tested benefits and credits including:
- Canada Child Tax Benefit
- Québec child assistance payment
- GST/HST credit
- Solidarity tax credit (Quebec)
- Tax credit for child-care expenses (Québec)
- Age credit
- Old-age security pension benefits (OAS)
- Guaranteed Income Supplement (GIS)
- Medical expense tax credit
- Refundable medical expense supplement
RRSP Disadvantages:
RRSP withdrawals are taxable
Any income you earn in RRSP is tax-free as long as the funds remain in your RRSP. However, you generally have to pay tax when you make withdrawals from your RRSP. The only two exceptions are transfers to the Home Buyers’ Plan and Lifelong Learning Plan.
You cannot claim capital loss on the RRSP.
If there is a loss on the RRSP investment, the Canada Revenue Agency does not allow you to treat it as a capital loss against your RRSP. It is simply a loss and can’t be deducted.
Capital gains are fully taxable when withdrawn from the RRSP
Outside your RRSP, you’re taxed on 50% of your capital gains. Inside your RRSP, capital gains are fully taxable upon withdrawal.
