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Advice, Uncategorized

Don’t Forget your RRSP Deductions at Tax Time

When you start preparing your income tax return, don’t do what many small business owners tend to do when they search for potential income tax deductions: neglect the Registered Retirement Savings Plan (RRSP) — one of the best income tax deductions.

The RRSP is the best income tax deduction for unincorporated businesses given that your RRSP contribution is deducted directly from your income and, therefore, has the potential to lower your tax rate. Note that for the 2011 tax year, the maximum allowable RRSP contribution is $22,450. In 2012, this amount will increase to $22,970 and in 2013 to $23,820. Nevertheless, you may be in a position to contribute more than $22,450 for the 2011 tax year, if you did not use your entire RRSP deduction limit for that tax year. You could in effect carry forward the unused portion to 2012.

Still, the problem is that your maximum RRSP contribution in any given year is tied to your earned income. Therefore, you may contribute up to 18 percent of your earned income in any given tax year (or the maximum annual RRSP contribution limit for that tax year, whichever is lower). Consequently, to make an RRSP contribution of $22,450 for the 2011 tax year, you must have earned at least $124,722 in income that year. You can determine your personal maximum RRSP contribution by calling the Canada Revenue Agency (CRA) TIPS service at 1-800-267-6999, or by looking at last year’s Notice of Assessment statement you received from them.

I would recommend that if you have earned sufficient income to allow you to make an RRSP contribution, you definitely should do so. In addition to giving you an immediate tax benefit it serves as an income tax deduction now, and any income your RRSP investment earns will also be tax exempt providing the funds remain in the RRSP. The deadline for RRSP contributions for the 2011 tax year is February 29, 2012.

Should you not have the funds to maximize your RRSP contribution and take full advantage of this income tax deduction, you might consider borrowing. Even though the interest expense is not deductible, the benefits of maximizing your RRSP income tax deduction may well offset the borrowing costs involved.

Considering the yearly rush in February and March to make RRSP contributions, it appears many people are unaware that in order to gain from this valuable income tax deduction, you don’t have to wait until “RRSP season” to make an RRSP contribution. In fact, the earlier in the year you make your RRSP contribution for any given year, the better positioned you will be to earn compound interest. With early contributions, you will earn considerably more money in your RRSP.

If you need more information on Registered Retirement Savings Plans, please contact me directly at: .(JavaScript must be enabled to view this email address)

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