RRSP CONTRIBUTIONS

Effect of an RRSP contribution on tax:

RRSP contributions are deducted in calculating net income, which in turn reduces taxable income. For clients of the tax clinic the federal tax rate is 14.5%. Therefore federal tax can be reduced by 14.5% of the contribution. Ontario tax can also be reduced.

For example, if taxable income is $50,000 then federal tax is $7,250. If taxable income is reduced to $40,000 by a $10,000 RRSP contribution the tax is $5,800. This is a savings of $1,450 which is 14.5% of the contribution.

In practical terms, an RRSP contribution reduces federal tax by 14.5 cents on the dollar, but only if tax is otherwise payable.

Effect of an RRSP contribution on benefits and credits:

Many benefits and credits (both refundable and non-refundable) are income-tested and reduced once net income exceeds certain thresholds. For example for the 2025 tax year:

• GST/HST Credit → reduced by 5% of family net income over $46,434
• Ontario Energy and Property Tax Credit → reduced for higher-income families
• Canada Child Benefit → reduced when family net income exceeds $38,237
• Medical Expenses Credit → only expenses above 3% of net income are claimable

Because an RRSP contribution lowers net income, it can increase eligibility for certain benefits and credits.