File your taxes with confidence
Your Registered Retirement Savings Plan (RRSP) isn’t only an important retirement savings vehicle, but a powerful tax-saving tool.
Here’s what you need to know about the RRSP deduction limit so you can minimize taxes, maximize retirement savings, and stay in CRA’s good graces.
Get your maximum refund, guaranteed*.
An RRSP deduction limit is the maximum amount of money you can contribute to your RRSP and claim as a tax deduction on your income tax return.
More specifically, it’s the lesser of 18% of your income from the previous year or the annual limit set by the CRA (up to a maximum of $30,780 for tax year 2023).
Even though your RRSP deduction limit and contribution limit are related, they aren’t the same thing.
An RRSP contribution limit sets a cap on the amount of money you can contribute to your RRSP in a given year. Your RRSP deduction limit determines the maximum amount of money you’re allowed to claim as a tax deduction on your income tax return for contributions made to your RRSP.
You can have the same deduction limit and contribution limit, but if you make a contribution and not deduct it from your income tax return, these amounts can be different.
Knowing your RRSP deduction limit helps you stay within your available contribution room. It can also help you maximize your tax refund, if you delay your RRSP deductions to a year when your total taxable income is higher.
Let’s look at an example with Manal’s situation:
Manal has an RRSP deduction limit of $14,400 and earns $80,000 per year, which puts him in the federal tax bracket of 20.5%.
Next year, Manal’s salary is expected to increase to $110,000, pushing him into a new tax bracket of 26%. Given this situation, Manal has two options:
In our example, Manal’s $14,400 RRSP contribution has the power to bring him into a lower tax bracket, from 26% to 20.5%, and save more taxes overall by saving his RRSP deduction for next year when his income will be higher.
To calculate your RRSP deduction limit, take the lesser of 18% of your previous year’s earned income or the maximum limit set by the CRA.
For example, if you made $180,000 in earned income last year.
Since your earned income last year exceeds the maximum RRSP contribution limit for 2023, your RRSP deduction limit would be $30,780.
It’s important to remember that there are other things that can affect your RRSP deduction limit, such as pension adjustments and unused contribution room from previous years.
100% of your RRSP is tax deductible. Contributions made to your RRSP reduce your taxable income dollar-for-dollar.
That means if you contribute $1,000 to your RRSP and claim the tax deduction for that contribution, your taxable income will be reduced by $1,000.
RRSP contributions you made in a given year don’t have to be claimed in the same year. Instead, these unused contributions can be carried forward to a future year.
You can’t contribute more than your allowable RRSP deduction limit in a year. If you do, your extra contributions, above $2,000, will get the attention of the CRA and you may face penalties of 1% per month .
Here’s the good news. Canadians who are 19 years and older can have $2,000 extra in their RRSP if they accidentally contribute more than the allowable amount. So if you accidentally over-contributed a few hundred bucks, it’s not going to cost you anything.
Just know that you won’t receive a tax deduction for the excess contribution.
