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Registered retirement savings plan

The RRSP is generally considered the most effective and widely applicable tax planning technique for Canadians. This is because any taxpayer, whether or not he or she owns a business, can claim a tax deduction for contributions made to the RRSP account. There is a maximum amount that is permitted to be deducted each year, and this maximum is calculated based on the prior year tax return of the individual. This maximum amount is called the deduction limit. The deduction limit can be calculated by a Canadian Chartered Accountant, or alternatively the government provides this amount each year on the assessment notice for the individual's prior year tax return. If the maximum contribution is exceeded by more than $2,000 the individual is subject to a penalty tax unless the excess is promptly withdrawn from the plan. When an RRSP contribution is made for less than the deduction limit, the shortfall is carried forward to the following year and is called Unused Deduction Room. The unused deduction room accumulates from year to year, and allows the taxpayer to contribute more than the deduction limit by this amount. Therefore any shortfall in a given year is not lost, but can be made up in a future year.
The deadline for making an RRSP contribution is two months after the end of the taxation year. An individual must set up an RRSP account at a financial institution in Canada and make contributions to that account or to a spousal account. If an individual makes contributions to his spouse's RRSP account, there is a tax advantage in that the contributor gets the tax deduction on his income tax return, but the recipient gets to withdraw amounts in the future and pay tax on the withdrawals. All withdrawals from an RRSP account are taxable in the year of withdrawal, but if income is lower at the time of withdrawal, tax is paid at a lower rate of taxation than the rate at time of contribution. The result would be to obtain a tax deduction when tax rates are high and pay tax on the withdrawal when tax rates are low. If one spouse has high income and the other spouse has low income, the spousal plan achieves a similar advantageous result, since the high income earner gets the tax deduction and the low income earner pays tax on the withdrawal at low tax rates.


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