RRSP(Registered Retirement Saving Plan) herein referred to as a fund can be used as a tool to save personal taxes. Contribution towards fund can be available as a deduction to the income shown in the income tax return i.e. T1. Contribution towards funds can be made through the person himself/herself or the employer of the person.
A person can contribute to his/her fund or the fund of his/her spouse so it would be helpful to reduce the taxes of the person who has higher tax liability. For example, If Mr. X has a total income of 60000 whereas his spouse has a total income of 10000 so Mr. X can contribute to the fund of his spouse and claim a deduction in his T1 which helps him to reduce taxes as Mr. X has higher tax slab rate as compared to his spouse.
There is a maximum limit to contribute. If you contribute more than the limit specified, then CRA may impose a penalty. You can check your limit on the My Account of CRA website and also in the notice of assessment sent by CRA to you. Limit is calculated using the total of the below 2 items:
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Unused deduction at the end of the preceding year
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The lesser of the two following items:
1. 18% of your earned income in the previous year
2. The annual RRSP limit (for 2021, the annual limit is $27,830)
Contribution towards the fund is made through payroll then it needs to be taken as a deduction from the payroll which will be paid to the fund by the employer on behalf of the employee.
You can calculate the payroll with the help of the payroll deduction online calculator of CRA If the employer has contributed towards the fund for an employee, then it will be considered taxable income to the employee and also deductible to the employee so it will not have any effect on the employee’s tax return in the end.
But when an employer contributes to a fund then it is to be considered when calculating the maximum limit available as mentioned above. One more thing, the employer’s contribution towards the fund can be claimed as an expense by the employer also.
Tax preparation is the process of preparing tax returns, often income tax returns, often for a person other than the taxpayer, and generally for compensation. Tax preparation may be done by the taxpayer with or without the help of tax preparation software and online services.
Tax planning is a focal part of financial planning. It ensures savings on taxes while simultaneously conforming to the legal obligations and requirements of the Income Tax Act, of 1961. The primary concept of tax planning is to save money and mitigate one’s tax burden.
Tax Preparation is a very cumbersome and elaborate process. It requires careful perusal of the financial activities of an organization for a specific period and compilation of all bills and relevant documents for the computation of tax.
It is not required to deduct all the contributions within a year of contribution only. Taxpayers can claim a partial amount in the year of contribution and the remaining can be claimed in future years so you can reduce the tax liability in the year of higher tax slabs.
For example, Mr. X has a taxable income of 10000 in the year of 2021 and is expected to have a taxable income of 50000 in the year of 2022 so Mr. X may not claim any deduction in the year of 2021 rather he may ask for a deduction in the year of 2022 as it will reduce the tax slab as compared to 2021.
In some cases, the employee has contributed his funds and wants to reduce his taxes deducted from the payroll. Employers can accept to deduct less tax based on the form TD1 submitted by the employee. An employee can ask for a reduction in the tax due to contribute towards the fund only if he/she has filed the form T1213 and submitted CRA.
