How Does an RRSP Tax Deduction Work?

During tax season, Canadians are constantly reminded to contribute to their RRSPs in order to receive a tax deduction. But how exactly does an RRSP tax deduction work, and how much do you need to contribute? Keep reading as I answer these questions and more.

Reminder: RRSP Contribution Deadline for 2023

Before we dive into RRSP deductions, here’s my reminder to you that the final day to contribute to your RRSP and be able to use the deduction for the 2022 tax year is Wednesday, March 1st, 2023. That said, I recommend not leaving it until the last second.

What Is an RRSP?

A Registered Retirement Savings Plan (RRSP) is a government-sponsored retirement savings account created by the Canadian government in 1957 as part of the Income Tax Act.

RRSPs have two primary advantages, both relating to tax savings. First, contributions to an RRSP are tax deductible in the year that you deposit the money into the plan.

Second, funds inside an RRSP are fully tax-sheltered until you withdraw them. Not paying tax on the income earned in an RRSP can substantially increase your retirement nest egg over the long run.

Types of RRSPs

There are three primary RRSP plan types: Individual, Spousal, and Group RRSPs. Here’s how each one works.

Individual RRSP

With an Individual RRSP, the account holder is also the contributor who receives the income tax deduction. When the RRSP funds are withdrawn, the account holder claims the withdrawal as income on their taxes.

Spousal RRSP

With a Spousal RRSP, the account holder and contributor are different. Spousal RRSPs are beneficial when one spouse expects to be in a higher income tax bracket in retirement when the funds are withdrawn – usually when one spouse earns substantially more money during their career.

The lower-income earner opens the Spousal RRSP in their name, with the higher-earning spouse as the plan’s contributor. Contributions are tax-deductible for the higher earner, but at retirement, withdrawals are taxed in the hands of the account holder, presumably the lower-income earning spouse.

Group RRSP

An employer sets up a Group RRSP plan for its employees, who fund it through payroll deductions. These plans provide employees with tax savings, and automated payroll deductions force employees to save for retirement. Administrative costs are also reduced due to the number of people under the plan.

There’s no limit to the number of RRSP plans you can have. Many people contribute to Group, Spousal, and Individual RRSP plans simultaneously. You do have to keep track of your available contribution room, however, to ensure you don’t exceed the limit. I’ll go over that in more detail a little later.

Are RRSP Contributions Tax Deductible?

As mentioned, RRSP contributions are fully tax-deductible. Here’s what that means. When you deposit money to your RRSP, your taxable income is reduced by the same amount up to your contribution limit.

Here’s a basic explanation:

If your taxable income is $75,000, and you contribute $7500 to an RRSP plan, your taxable income will drop by $7,500 to $67,500. Remember that other tax credits and deductions can further reduce your taxable income. That’s $7500 that you won’t have to pay tax on.

Depending on your marginal tax rate, you can get 20% and 50% of your RRSP contributions back as a tax refund.

How Do I Calculate My RRSP Contribution Limit?

Annual and lifetime RRSP contribution limits restrict how much you can contribute. You must have earned income in the previous year to accumulate contribution room for the current tax year.

Your annual RRSP contribution limit is 18% of your income up to a maximum of $29,210 for 2022. For example, if you earned $50,000 in 2022, you can contribute $9,000 to your RRSP.

Unused RRSP Contribution Room

If you don’t maximize your RRSP contribution, the unused contribution room is carried forward to future years. If you have unused room, you can contribute over your annual limit if it makes sense.

How Do RRSP Over-Contributions Work?

What happens if you contribute above your lifetime RRSP limit? The Canada Revenue Agency (CRA) has a provision that allows you to exceed your lifetime RRSP contribution limit by $2000. This accounts for any oversights or other calculation errors.

If you exceed the $2000 allowance, the penalties are steep.

Generally, you’ll have to pay 1% per month on the amount until you’ve withdrawn the over-contribution from your RRSP. You don’t have to pay the penalty if you notice the excess contribution and correct it before the end of the month the over-contribution was made.

How Much RRSP Should I Contribute to Avoid Paying Taxes?

There’s no rule on how much you should contribute to your RRSP each year. But ideally, you don’t want to receive an income tax bill over and above the amount deducted from your paycheque every two weeks.

When you prepare your income tax return, you’ll know whether you’re in a position to get a refund or will have to pay more tax. If you have to pay income tax, I recommend contributing enough money to your RRSP to reduce your amount payable to zero.

Remember that saving money on taxes is only one reason for contributing to an RRSP. Many people tend to forget this. When deciding how much to contribute, your primary objective should be to ensure you save enough money to meet your retirement goals. From there, look for tax savings opportunities.

How to Calculate the Right RRSP Contribution Amount

While there are other factors to consider, including affordability, I recommend you speak with an investment advisor and/or tax professional to determine how much you should contribute to your RRSP. An investment advisor can help you stay on track for your retirement goals, while an accountant can ensure you’re not paying more income tax than you need to.

In addition, popular online tax software programs like TurboTax and Wealthsimple Tax have tools to help you calculate your ideal RRSP contribution amount.

Where Can I Make an RRSP Contribution?

To make an RRSP contribution, you’ll need to open an RRSP account. You can do that at any Canadian bank or credit union – even online banks like Tangerine or Simplii Financial have RRSP accounts.

However, if you want more control over your RRSP investment, I recommend opening an account with an online brokerage. With an online broker, you can hold many different investments in your RRSP, including stocks, bonds, ETFs, mutual funds, GICs, etc.

Questrade is our top choice for online brokerage here at RetireHappy.

Final Thoughts

Earlier, I mentioned that you can determine your RRSP deduction amount when you complete your income tax return. But what happens if you file your taxes after the March 1st deadline? By then, it’s too late to make an additional RRSP contribution to use for the current tax year. For this reason, I recommend that you sort out your RRSP deduction before the deadline.

If your employment situation and income haven’t changed much over the previous year, then you probably have a good idea of how much you need to contribute. Another option would be to consult with an accountant before the RRSP deadline.

Last, using a tax software program, you can start your tax return early. If you’re not ready to file, you can save your progress and return to it later once you have the required information slips. If you haven’t received your T4, plug in the numbers from your year-end pay stub, as they should be fairly close to the official figures.

Try to get an estimate as to where you stand with your refund. Play around with the RRSP contribution tool in your tax software. This should help you determine your ideal contribution amount.

Remember, you can avoid the last-minute rush by contributing to your RRSP regularly throughout the year.


  1. Curt

    Please comment on the strategy available to the very few out there who come by an income windfall in 2022, have loads of RSP contribution room, and want to contribute well over what will benefit taxpayer in “immediate” tax savings, ie: contribute up to contribution limit, but “report” it to CRA to taxpayer’s advantage in a number of subsequent years. I understand this can be an advantage to some.

  2. Leo

    In that situation I would consult a tax expert. There is a lot of math involved with tax brackets, tax on investment income, and age/lifestyle choices that will determine what contributions and when to make them that will be most advantageous.

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