If you are looking for a way to lower your tax bill while building wealth for the future, the Registered Retirement Savings Plan (RRSP) is arguably the most powerful tool in the Canadian financial toolkit. Here you will learn how to use the RRSP to reduce your taxes in Canada.
However, many Canadians treat their RRSP as a black box: they put money in because they “should,” but they don’t fully understand the mechanics of how it saves them money.
In this guide, we’ll break down exactly how RRSPs reduce your taxes, the difference between a deduction and a credit, and the deadlines you need to know for the 2025 tax year.
1. The Immediate Benefit: Reduce Your Taxable Income
The primary way an RRSP reduces your taxes is by lowering your taxable income.
When you contribute to an RRSP, the government treats that money as if you never earned it in the first place—at least for this year. This is called a tax deduction.
How the Math Works
Canada has a progressive tax system, meaning the more you earn, the higher the percentage of tax you pay on the last dollar you earned (your marginal tax rate).
Canadian Personal Income Tax Bracket chart
Example:
Let’s say you live in Ontario and earn $80,000 a year.
- Your federal marginal tax rate is 20.5%
- Your provincial marginal tax rate is 9.15%
- You will pay $15,126 in income taxes.
This means that you are in the 29.15% tax bracket. So for the next $100 you earn, you will pay $29.15 in income tax.
However, if you contribute $10,000 to your RRSP:
- Your taxable income drops from $80,000 to $70,000.
- Even though you are still in the same tax bracket, you pay income taxes on a lowered amount.
- Your new taxes owing will move from $15,216 to $12,161.
- You will save $3055 in taxes and also have $10,000 invested in your RRSP.
If your employer has already deducted taxes from your pay cheque based on an $80,000 salary, the CRA will refund you that $3055 when you file your taxes.
Take a look at this 2025 Personal Tax Calculator from EY Tax Accountant website
Financially Wise Tip: The higher your income, the more effective an RRSP becomes. If you earn over $100,000, your marginal tax rate is much higher (over 43% in many provinces), meaning your refund will be significantly larger for the exact same contribution.
2. The Long-Term Benefit: Tax-Deferred Growth
The tax refund is great, but the “superpower” of the RRSP is tax-deferred growth.
In a regular non-registered account, you have to pay taxes every year on the interest, dividends, or realized capital gains your investments earn. This creates a “tax drag” that slows down your compounding.
Inside an RRSP:
- You pay zero tax on interest.
- You pay zero tax on dividends (even foreign ones like US stocks).
- You pay zero tax on capital gains.
You do not pay a cent of tax until you actually withdraw the money, usually decades later. This allows your money to compound faster. Additionally, when you do finally withdraw funds in retirement, you are probably in a lower tax bracket.
3. The “Tax Arbitrage” Strategy
You might be thinking, “But I still have to pay tax when I withdraw the money eventually!”
Yes, but the goal is to play the game of Tax Arbitrage. The strategy is simple:
- Contribute when you are in your peak earning years (high tax bracket).
- Withdraw when you are retired (lower tax bracket).
If you contribute today while paying a 40% tax rate but withdraw in retirement when your rate is only 20%, you have permanently pocketed that 20% difference.
4. Important Numbers for 2025
To make the most of your RRSP, you need to know the limits.
The Contribution Limit
For the 2025 tax year, your RRSP contribution limit is 18% of your earned income from the previous year, up to a maximum of:
$32,490
Note: If you have unused room from previous years, your actual limit may be much higher. Check your Notice of Assessment from the MyCRA website.
The Deadline
The deadline to make a contribution that counts toward your 2025 taxes is March 2, 2026.
5. When Should You Not Use an RRSP?
While RRSPs are powerful, they aren’t always the best choice. You might want to prioritize a TFSA (Tax-Free Savings Account) if:
- You earn a lower income: If you earn less than $50,000, your tax rate is low. You likely won’t get a large refund, and you might actually pay more tax upon withdrawal if your income increases in retirement (due to CPP/OAS).
- You expect your income to jump soon: If you are a student or a medical resident expecting a massive salary hike next year, it’s better to save your RRSP contribution room for when you are in a higher tax bracket.
Summary
- RRSPs lower your taxes today: Contributions are deducted directly from your taxable income.
- RRSPs grow faster: Your investments compound tax-free as long as they stay in the account.
- Know your limit: The maximum annual limit for 2025 is $32,490.
- Mark your calendar: The deadline for the 2025 tax year is March 2, 2026.
