RRSP

Definition

A Registered Retirement Savings Plan (RRSP) is a tax-deferred savings vehicle governed by ITA s.146. Contributions are deductible against income in the year claimed, investment income earned inside the plan is not taxed annually, and withdrawals are fully taxable at the holder's marginal rate in the year of withdrawal. The deferral is the core benefit: most contributors expect a lower marginal rate in retirement than during their working years.

Key rules

• Annual contribution room is the lesser of 18% of previous-year "earned income" (salary, self-employment, net rental, etc.) and the annual dollar limit. The 2026 dollar limit is $32,490 (confirm current year figure on canada.ca).
• Unused room carries forward indefinitely. The CRA Notice of Assessment shows the cumulative limit.
• The deadline to contribute for a given tax year is 60 days after year-end (typically March 1 or February 29).
• Over-contributions above a $2,000 lifetime buffer trigger a 1% per-month penalty tax under s.204.1.
• Dividends do not create RRSP room because they are not "earned income". Only salary and similar earned-income amounts build room, which matters for owner-manager salary versus dividend planning.
• Withdrawals are subject to source withholding: 10% up to $5,000, 20% up to $15,000, and 30% above $15,000 (higher in Quebec).
• The Home Buyers' Plan (HBP) allows up to $60,000 withdrawal for a first home, repaid over 15 years. The Lifelong Learning Plan (LLP) allows up to $20,000 for eligible education, repaid over 10 years.
• RRSPs must be collapsed (converted to a RRIF or annuity) by December 31 of the year the holder turns 71.

Example

An owner-manager paid herself $100,000 of T4 salary in 2025 and has $5,000 of unused RRSP room carried forward.

18% x $100,000                  = $18,000  (below 2026 dollar limit)
Plus carry-forward              = $5,000
2026 RRSP deduction room        = $23,000

Contribution made Feb 20, 2026:   $15,000
Marginal rate at $100k income:    ~43% (federal + provincial combined)
Tax refund (approximate):         $6,450
Remaining unused room:            $8,000

The contribution is claimed as a deduction on Line 20800 of the 2025 T1.

Common mistakes

• Relying on dividends-only compensation and later discovering no RRSP room was ever created.
• Missing the 60-day deadline for a current-year deduction. Contributions after the deadline belong to the following tax year.
• Over-contributing beyond the $2,000 buffer and incurring monthly penalty tax.
• Forgetting to report the pension adjustment (PA) from a defined-benefit plan, which reduces available room.
• Using a RRIF withdrawal strategy without projecting OAS clawback thresholds.

Related concepts

The RRSP is one of three major registered plans for personal tax planning. The TFSA offers tax-free growth but no deduction, and the FHSA combines both for first-home buyers. At the federal level, the RRSP deduction is the clearest case of the deduction versus credit mechanic.