An RRSP works in three tax stages: contributions are deducted from your taxable income the year you claim them, investments inside the plan grow with no annual tax on interest, dividends, or capital gains, and withdrawals are added to your income and taxed at your marginal rate. That is how RRSP tax works in a sentence, and the whole plan is built under Section 146 of the Income Tax Act.1Justice Laws Website. Income Tax Act – Section 146 The strategy behind it is straightforward: contribute while you are in a higher tax bracket and withdraw later when your rate is lower.
The Deduction on the Way In
Every dollar you contribute can be deducted from your gross income under subsection 146(5) of the Income Tax Act.1Justice Laws Website. Income Tax Act – Section 146 Earn $90,000, contribute $10,000, and you report $80,000. The value of that deduction depends on your marginal rate. Someone taxed at a 40% combined rate saves $4,000 on a $10,000 contribution.
Your annual contribution room is 18% of the previous year’s earned income, capped at a dollar figure the CRA sets. For 2025 the cap is $32,490.2Canada Revenue Agency. How Contributions Affect Your RRSP Deduction Limit Any pension adjustment from a workplace plan reduces that figure. You do not have to calculate any of this yourself; the CRA prints your personal deduction limit on each Notice of Assessment.
Unused room carries forward indefinitely. If you could not max out contributions in your twenties, that space accumulates and waits, ready to be used against a higher-earning year later.2Canada Revenue Agency. How Contributions Affect Your RRSP Deduction Limit You can also contribute in one year and claim the deduction in a later one. There is no deadline for claiming a deduction on a contribution you have already made, so a deposit made now can wait for the year it will be worth the most.
The 60-Day Contribution Window
RRSP contributions do not follow the calendar year. Contributions made in the first 60 days after December 31 can be applied to the previous tax year. For the 2025 tax year, the deadline is March 2, 2026.3Canada Revenue Agency. Contribution Year Miss it and you lose the ability to deduct that contribution against the earlier year, though the room itself is not lost.
Tax-Free Growth Inside the Plan
Once money is in the RRSP, interest, dividends, and capital gains all compound with no annual tax. In a non-registered account you would owe tax each year on interest and dividends, plus tax on any realized gains. The CRA does not touch any of it inside the plan until you withdraw. Over decades of compounding, that shelter is the single largest reason to use the account.
Tax on the Way Out
Withdrawals are added to your income for the year and taxed at your marginal rate. Your financial institution withholds tax at source before releasing the funds, with the rate rising by the size of the withdrawal:4Canada Revenue Agency. Tax Rates on Withdrawals
- Up to $5,000: 10% withheld (5% in Quebec)
- $5,001 to $15,000: 20% withheld (10% in Quebec)
- Over $15,000: 30% withheld (15% in Quebec)
Quebec residents pay a separate provincial withholding on top of the federal rate, so the combined figure differs from other provinces.4Canada Revenue Agency. Tax Rates on Withdrawals
The withholding is a prepayment, not the final bill. Your institution issues a T4RSP slip showing the gross withdrawal and the tax withheld, and you report the full amount as income. Take $20,000 out on top of $70,000 of employment income, and you are taxed on $90,000. If the withholding falls short of your actual marginal rate, you owe the difference at filing. If you withdraw during a low-income year, part of the withholding may come back as a refund.
Two costs of early withdrawals are easy to miss. The contribution room is gone permanently. Unlike a TFSA, RRSP withdrawals do not restore future room. You also lose the sheltered growth those dollars would have produced.
Two Ways to Withdraw Without Immediate Tax
Two federal programs let you take money out of an RRSP without triggering tax on the withdrawal, provided you repay on schedule.
The Home Buyers’ Plan allows first-time buyers to withdraw up to $60,000 to buy or build a qualifying home, with no withholding and nothing added to income at the time.5Canada Revenue Agency. The Home Buyers’ Plan You repay over 15 years in roughly equal annual amounts. Any installment you skip is added to your taxable income for that year instead.
The Lifelong Learning Plan funds full-time education. You can withdraw up to $10,000 per year, to a lifetime total of $20,000, tax-free.6Canada Revenue Agency. Lifelong Learning Plan (LLP) Repayment runs over about 10 years, and missed installments become taxable income the same way.
What Happens at Age 71
An RRSP must mature by December 31 of the year you turn 71.7Canada Revenue Agency. RRSP Options When You Turn 71 You have three choices at that point:8Canada Revenue Agency. Receiving Income From an RRSP
- Convert to a RRIF. Investments stay sheltered and you draw income, but the government sets a minimum annual withdrawal that increases each year.
- Buy an annuity from an insurance company. Payments are taxable as received.
- Withdraw the entire balance. The full amount is taxed in one year, almost always at the top bracket.
Most retirees choose the RRIF because withdrawals above the minimum remain flexible and the balance keeps growing sheltered. The mandatory minimum starts at 5.28% of the RRIF balance at age 71, rises to 6.82% at 80, and reaches 20% at 95 and older.9Canada Revenue Agency. Chart – Prescribed Factors The shelter cannot run forever; the schedule is designed to draw the money out and tax it during your lifetime.
What Happens at Death
When the plan holder dies, the CRA generally treats the full fair market value of the RRSP as income received immediately before death. That entire amount lands on the deceased’s final return and often pushes the estate into the highest combined federal-provincial bracket.10Canada Revenue Agency. Death of an RRSP Annuitant A $400,000 RRSP can produce a tax bill above $180,000 in a single year.
The main exception is a rollover to a surviving spouse or common-law partner named as sole beneficiary. The RRSP transfers to the spouse’s own RRSP or RRIF with no income inclusion on the deceased’s return and no immediate tax; the surviving spouse takes on the tax when they eventually withdraw. A financially dependent child or grandchild can also qualify for a rollover in certain circumstances, including a transfer to a Registered Disability Savings Plan where the dependent has a qualifying impairment.11Canada Revenue Agency. Registered Retirement Savings Plan – Prepare Tax Returns for Someone Who Died Without a qualifying beneficiary, the deemed disposition tax hits the final return in full.
How Withdrawals Affect OAS and GIS
RRSP and RRIF withdrawals count as income for Old Age Security. If your net income exceeds $95,323 in 2026, the OAS recovery tax claws back 15 cents of every dollar above that threshold.12Canada Revenue Agency. Old Age Security Pension Recovery Tax A large withdrawal or a rising RRIF minimum can push a retiree over that line without warning.
The Guaranteed Income Supplement, which supports lower-income seniors, is more sensitive. Every dollar of RRSP or RRIF income reduces the benefit. For retirees who depend on GIS, an unplanned withdrawal can cut into monthly payments they were counting on.
Over-Contribution Penalty
The CRA allows a lifetime buffer of $2,000 above your deduction limit to absorb small errors. Once you cross that buffer, you owe a 1% per month penalty tax on the excess, and it keeps accruing until you either withdraw the excess or earn enough new room to absorb it.13Canada Revenue Agency. Excess Contributions The $2,000 buffer only applies if you were 18 or older at any time in the preceding year.
The penalty is reported on Form T1-OVP, which must be filed with payment within 90 days after the end of the calendar year in which the over-contribution existed. The CRA can waive the 1% tax if you show the over-contribution came from a reasonable error and you have already taken steps to fix it, by written request with documentation.13Canada Revenue Agency. Excess Contributions
US Citizens and Residents With an RRSP
If you are a US citizen, green card holder, or US tax resident, the sheltered treatment your RRSP gets in Canada does not automatically carry to the US side. Under Article XVIII of the US-Canada tax treaty, US residents who are RRSP beneficiaries can elect to defer US tax on income accruing inside the plan until distribution.14Canada Revenue Agency. Convention Between Canada and the United States of America Without the election, the IRS would tax annual gains as they accrue and erase the shelter. The election is treated as made when you properly disclose the RRSP on your annual foreign account filings.
Two disclosures typically apply. The FBAR (FinCEN Form 114) is required if the combined value of your foreign financial accounts exceeds $10,000 at any point in the year, filed electronically with FinCEN rather than the IRS.15FinCEN.gov. Report Foreign Bank and Financial Accounts Form 8938 is required if your specified foreign financial assets exceed $50,000 on the last day of the year or $75,000 at any point for single filers, with $100,000 and $150,000 thresholds for joint filers, filed with your Form 1040.16Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets You should also disclose the account on Schedule B of Form 1040.
When you take a distribution, the US treats the full amount as ordinary income. To avoid double tax, you can claim a foreign tax credit on Form 1116 for the Canadian tax paid on the same withdrawal, offsetting your US liability up to the amount of US tax attributable to that foreign income. Failing to file the FBAR carries penalties up to $10,000 per account per year for non-willful violations, and substantially more for willful ones.