How to Save on Taxes By Maximizing Your RRSP Contribution

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by Enoch Omololu


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Tax season will soon be upon us and you can save on your tax bill and get a nice refund by maximizing your Registered Retirement Savings Plan (RRSP) contribution for the 2021 or 2022 tax years.

There is an extension of 60 days into a current year to make RRSP contributions that can be claimed as deductions in your tax returns for the previous tax year. For example, for the 2021 tax year, the RRSP contribution deadline is March 1, 2022.

You can lower your taxes by making an RRSP contribution and claiming the tax deduction when you file your taxes.

Make RRSP Contributions

One of the easiest ways to get a tax refund and lower your taxable income is by making contributions to your RRSP.

Every year you can contribute to your RRSP or to that of your spouse if you have earned income or have RRSP contribution room. The contribution room is 18% of your earned income for the previous year up to a maximum amount defined annually by the Canada Revenue Agency (CRA).

The maximum RRSP contribution limit for the 2021 tax year was $27,830, while for 2022, it increases to $29,210.

RRSP contribution room can be carried forward from year to year. You can find out what your current total contribution room is by checking your notice of assessment or through your CRA My Account.

If you contribute to a pension plan at work, your annual RRSP contribution room may be decreased through a pension adjustment. It will also decrease if you contribute to a spousal RRSP.

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How Much Tax Refund Can I Expect?

The refund amount you get after sending in your tax return depends on your current marginal tax rate. For example, if your marginal tax rate is 35% and you contributed $5000 to your RRSP, you should expect a refund amounting to $1,750 (i.e. $5000 x 35%).

What the RRSP contribution does is that it reduces your taxable income today by deferring the taxes on your contribution amount until retirement when you start withdrawing retirement income.

How To Save On Taxes By Maximizing Your RRSP Contribution

Contribute To A Spousal RRSP

This offers couples an opportunity to lower their combined tax burden in retirement. If one spouse earns significantly more than their counterpart (i.e in a higher tax bracket), they can choose to contribute to a spousal RRSP.

A benefit of the spousal RRSP is that the contributor can claim the contribution as a deduction on their tax return, while the receiving spouse will still have their own full RRSP contribution room available to them.

Another benefit is the “income-splitting” which lowers the family’s overall tax burden. When retirement savings are split between the spouses, the amount of taxes paid on retirement income by the couple is lower than it would be if one of them had most of the income/savings.

You can contribute to a spousal RRSP until the end of the year your spouse turns 71.

A three-year attribution rule applies to spousal RRSP contributions. If the spousal RRSP contribution is withdrawn within 3 calendar years from when the contribution was made, the contributor will have to pay tax on the amount.

After three calendar years, any withdrawal is taxed in the hands of the plan holder.

For example, if you made a spousal contribution in February 2022, the earliest time a withdrawal wouldn’t attract attribution (i.e. taxation in the hands of the contributor) is January 2025.

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Final Thoughts

RRSP contributions are a good way to reduce your current tax bill and get a refund. The tax is deferred to a time in retirement when you are probably earning less and paying less in income tax.

A good investment strategy is to beef up your retirement savings by also investing your annual tax refund.

If you are new to the workforce and earning entry-level or lower wages, a Tax-Free Savings Account (TFSA) may be a better investment strategy at this time of your life. Your RRSP contribution room will add up as it is carried forward from year to year.

When your income increases, you can start using up your RRSP room. The income tax refund you get at this time can then go into increasing your RRSP contributions (more refunds!), or into your TFSA, or both.

If your employer offers a group RRSP and matches your contributions on any level, you will likely be better off maximizing your contributions irrespective of what you are earning.

If you have high-interest debt (credit card debt, for example), pay this off first. One other financially savvy thing you can do with your refund is to build an emergency fund if you don’t have one.

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Enoch Omololu

Enoch Omololu is a personal finance expert and a veterinarian. He has a master’s degree in Finance and Investment Management from the University of Aberdeen Business School (Scotland) and has completed several courses and certificates in finance, including the Canadian Securities Course. He also has an MSc. in Agricultural Economics from the University of Manitoba and a Doctor of Veterinary Medicine degree from the University of Ibadan. Enoch has a passion for helping others win with their personal finances and has been writing about money matters for over a decade. He has been featured or quoted in The Globe and Mail, Winnipeg Free Press, Wealthsimple, Financial Post, Toronto Star, CTV News, Canadian Securities Exchange, Credit Canada, National Post, CIBC, and many other personal finance publications.

His top investment tools include Wealthsimple and Questrade. He earns cash back on purchases using KOHO, monitors his credit score for free using Borrowell, and earns interest on savings through EQ Bank.

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