Clients often ask us to advise them on what they can do to pay less taxes. The best way to defer your taxes is to invest in an RRSP. An RRSP lowers your taxable income now so you can enjoy a tax savings in the current tax year.
The philosophy is that you reduce your taxable income by way of investing in your RRSP in years where your earnings should be higher – when you are employed. When you retire, you will be taxed on the money you withdraw. That is why it is called a tax deferral. You defer paying taxes on your income until your income should be significantly lower – when you are retired.
Contributions made from March 2nd to December 31st of the tax year will be included in the taxation year. Contributions made in the first 60 days of year (Jan 1st to March 1st) can count towards the taxation year, but you can elect to defer the contributions. Any contributions made after the first 60 days of the year will count towards the next taxation year.
Do you know your contribution limit? Do you know that you can over contribute to your RRSP? It is important to ensure that you do not contribute more to your RRSP than the balance in your unused contribution room. If you have a spouse and you have contribution room, it may make sense to contribute to a spousal RRSP for your spouse. You can either access this information by calling CRA, through your My Account Services or contact BMP Accounting and Taxes.