How to unlock tax-efficient RRSP strategies

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By Colleen O’Connell-Campbell

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As the annual deadline for registered retirement savings plans approaches, now is the perfect time to evaluate how RRSPs and other financial strategies can work for you and your family.

Whether your goal is tax savings, income smoothing or building a financial legacy, RRSPs and tools such as spousal RRSPs and individual pension plans (IPPs) offer unique advantages. As a business owner with strong cash flows, these tools are tailored to help you make the most of your income and secure your financial future.

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Here’s a guide to help you navigate some of the nuances of retirement and tax planning for owner-managed businesses before the March 3 deadline.

Building wealth while saving taxes

An RRSP isn’t just a retirement tool; it’s your strategic lever for tax efficiency. Contributions reduce your taxable income for the year, potentially moving you into a lower tax bracket, while investments within your RRSP grow tax-deferred until withdrawn. This is especially advantageous if your income varies from year to year.

If you’re paying yourself a T4 salary through your corporation, contributing to an RRSP is an essential strategy. For example, in 2024, the contribution limit is 18 per cent of your 2023 earned income, capped at $31,560. This deduction can reduce your taxable income while instilling a disciplined savings approach.

Planning ahead is equally important for maximizing your RRSP benefits. For the 2025 tax year, your contribution limit remains 18 per cent of earned income reported on your 2024 tax return, with a maximum of $32,490.

By reviewing your income and available RRSP room early, you can align contributions with your cash flow and optimize your tax benefits.

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A solution for high-earning business owners

If you’re over 40 and paying yourself a stable T4 income, an IPP could unlock even greater tax savings and retirement contributions. As a defined-benefit pension plan, an IPP allows for contributions that exceed RRSP limits, particularly as you approach retirement, and has several other advantages:

• Higher contribution limits: An IPP allows your allowable contributions to increase with age. For example, at age 60, you could annually contribute up to $51,677, compared to $31,560 for an RRSP.
• Corporate tax deductions: All IPP contributions, whether for past or future service, are tax deductible to your business, reducing its taxable income.
• Intergenerational planning: IPPs make it easier to transfer wealth to the next generation, tax-deferred, if you’re running a family business.
• Creditor protection: The funds in your IPP are generally protected from creditors, giving you added peace of mind.

If your cash flow supports it, an IPP could become an integral part of your financial strategy. Speak to both your financial adviser and your accountant to determine if it’s the right fit for your goals.

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Balancing spousal retirement incomes

If you’re married or in a common-law partnership, a spousal RRSP can help you equalize taxable income in retirement. The focus isn’t on accumulating equal assets, but on balancing the taxable income streams you and your partner will draw in retirement.

For example, by contributing to a spousal RRSP, you can claim the deduction now, while your partner pays tax on withdrawals later, likely at a lower rate.

You should also consider all future income sources between you and your partner to ensure you’re strategically directing contributions between each of your RRSPs and/or spousal RRSPs to balance out future income streams.

Ask yourself how defined-benefit pension plan payments, Canada Pension Plan and Old Age Security benefits, rental income, dividends and proceeds from the sale of your business upon exit will affect your cash flows in retirement. Planning with these factors in mind will help optimize your overall financial strategy.

Your freedom fund

If retirement feels too abstract, think of your RRSPs, IPPs and other strategies as a “freedom fund.” This fund provides financial independence and empowers you with choices, whether it’s to scale back work, pursue other ventures or simply enjoy life.

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Align your fund with your future cash-flow needs, incorporating RRIF withdrawals, pension-income splitting, and other tax-efficient strategies.

Remember: it’s not about how much you accumulate, but about creating sustainable income streams that align with your life goals.

RRSP season isn’t just about meeting a deadline; it’s about building a strategy that supports your financial future. As a business owner, you have unique opportunities to leverage RRSPs, IPPs and spousal RRSPs for maximum tax advantages and long-term stability.

By embracing these strategies — and planning ahead for future contribution opportunities — you can turn the RRSP season into a cornerstone of your wealth-building journey. You’ll empower yourself and your family for years to come.

Colleen O’Connell-Campbell is a wealth adviser at RBC Dominion Securities Inc. and host of the Cash-Rich Exit Podcast.

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