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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contribution is exceeded by more than $2,000 the individual is subject to a penalty tax unless the excess is promptly withdrawn from the plan.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.
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