How does an RRSP contribution reduce my taxes as an Ontario resident?

An RRSP (Registered Retirement Savings Plan) contribution gives you a deduction that reduces your net income on your T1 return. Because Ontario provincial tax is calculated on income after RRSP deductions, the deduction saves you both federal and Ontario provincial tax. The combined saving depends on your marginal rate at the time of contribution.

Your RRSP contribution room is based on 18% of your prior year's earned income, up to the annual dollar limit set by the CRA. Unused room accumulates and carries forward indefinitely. The CRA shows your available room on your Notice of Assessment each year.

You do not have to claim the deduction in the year you contribute — you can carry it forward to a higher-income year, which can increase the tax saving. Withdrawals from an RRSP are fully taxable in the year taken, so the benefit is in the deferral and in withdrawing at a lower rate (often in retirement). Spousal RRSP strategies can also help equalize income between partners. A tax professional can help you time contributions and deductions for maximum benefit.