*Updated for October 2024*
Many high income earners struggle to max out their RRSP deduction limit each year and as a result have loads of unused RRSP contribution room from prior years. While we can debate about whether it’s appropriate for middle and low income earners to contribute to an RRSP or a TFSA, the reality for high earning T4 employees is that an RRSP contribution is the best way to reduce their tax burden each year.
The RRSP deduction limit is 18% of your earned income from the prior year, up to a maximum of $32,490 for the 2025 tax year, plus any unused RRSP room from previous years.
An employee who earns $125,000 per year can contribute $22,500 annually to their RRSP. While that’s straightforward enough, coming up with $1,875 per month to max out your RRSP can be a challenge. An even greater challenge is catching up on unused RRSP room from prior years.
Related: So you’ve made your RRSP contribution. Now what?
Let’s say you live in Ontario, earn a salary of $125,000 per year, and you want to start catching up on your unused RRSP contribution room. Your gross salary is $10,416.67 per month and you have $2,627.08 deducted from your paycheque each month for taxes, leaving you with $7,789.59 in net after-tax monthly income.
Your goal is to contribute $2,000 per month to your RRSP, or $24,000 for the year. This maxes out your annual RRSP deduction limit ($22,500), plus catches up on $1,500 of your unused RRSP contribution room from prior years. Stick to that schedule and you’ll slowly whittle away at that unused contribution room until you’ve fully maxed out your RRSP. Easy, right?
Unfortunately, you don’t have $2,000 per month in extra cash flow to contribute to your RRSP. After housing, transportation, and daily living expenses you only have about $1,200 per month available to save for retirement.
No problem.
That’s right, no problem. Here’s what you can do:
T1213 – Request To Reduce Tax Deductions at Source
Simply fill out a T1213 form (Request to Reduce Tax Deductions at Source) and indicate how much you plan to contribute to your RRSP next year. Submit it to the CRA along with proof – such as a print out showing confirmation of your automatic monthly deposits. The CRA will assess the form and send you back a letter to submit to your human resources / payroll department explaining how they should calculate the amount of tax they withhold for the year.
New: You can now submit the T1213 form online by scanning your form and supporting documents and sending them through the “Submit document online” service in your CRA My Account.
Note that you’ll need to fill out and submit the form every year. It’s best to do so now (mid October, early November) for the next calendar year so you have time for the form to be assessed and then you can begin the new year with the correct (and reduced) taxes withheld.
That said, the CRA will approve letters sent throughout the year – it just makes more sense to line this up with the start of the next calendar year.
Reducing taxes withheld from your paycheque frees up more cash flow to make your RRSP contributions. It’s like getting your tax refund ahead of time instead of waiting until after you file. Let’s see how that would work using our example from Ontario.
You’ve signalled to CRA that you plan to contribute $24,000 to your RRSP next year. In CRA’s eyes, that brings your taxable income down from $125,000 to $101,000. This will make a significant difference to your monthly cash flow.
Recall that you previously had $2,627.08 in taxes deducted from your monthly paycheque. After your T1213 form was assessed and approved, the taxes withheld from your paycheque each month goes down to $1,831.08 – freeing up an extra $796 in monthly cash flow that was previously being withheld for taxes. That’s an extra ~$9,552 that you can use to crush your RRSP contributions next year.
Now, to be clear, you need to follow through and make the $24,000 RRSP contributions that you promised to CRA. Otherwise you’ll face a bigger tax bill for the next tax year, and risk not getting the T1213 form approved again.
Once your T1213 form has been assessed and approved you’ll receive a letter that looks something like this to give to your employer:
The biggest advantage to reducing your taxes withheld at the source is to increase your cash flow so you can make those big RRSP contributions. Otherwise, your options are to take out an RRSP loan to help reach or exceed your deduction limit, or wait for your tax refund and then contribute that lump sum along with your smaller monthly contributions.
**Optimize Your RRSP**
I have a general savings philosophy that goes something like this:
- Utilize employer matching savings plan – basically take advantage of your employer match, it’s free money!
- Optimize your RRSP contributions – contribute enough to bring your taxable income down to the bottom of your highest marginal tax rate
- Maximize TFSA – max out your TFSA, eventually.
- Prioritize short-term goals – once the first three goals have been funded, extra cash flow should be allocated to short-term goals such as buying a new vehicle, taking a dream vacation, renovating your home, funding a parental leave or early retirement, etc.
On the RRSP front, I use EY’s excellent tax calculators & rates page (updated annually) and the Canadian personal tax rates by province sections to determine what those marginal tax brackets are for my clients.
What does optimizing mean? For instance, in the example we’ve been using above (Ontario worker with $125,000 gross income) it might make sense to only contribute $13,266 to their RRSP to bring their taxable income down to $111,734 – the bottom of the 43.41% marginal tax bracket).
That way, every single dollar contributed to the RRSP is going to save 43.41 cents in taxes.
Contribute one more dollar, and that dollar will only receive 37.91 cents in tax relief.
Of course, it might be perfectly sensible to contribute more and get a blended tax deduction (some at 43.41% and some at 37.91%). Maybe you’d want to bring down your income to the bottom of the 37.91% marginal tax bracket, but no further.
Final Thoughts
Back to our Ontario example, let’s say you did not fill out the T1213 form and instead just contributed your available cash flow of $1,200 per month or $14,400 per year. That would reduce your taxable income to $110,600 and give you a tax refund of $6,189.
You could do anything with that tax refund, and a lot of surveys suggest Canadians are more inclined to spend their refunds because they’re seen as windfalls.
Meanwhile, had you simply filled out the T1213 form and then contributed $2,000 per month to your RRSP, you’d have reduced your tax bill by $9,552 and have nearly $10,000 more saved inside your RRSP.
Who’s crushing it, now?
