RRSP deduction/contribution limit and tax credits

[TheGame]

I've been trying to understand this over the past couple of days, and have read through some old threads, and I think I get the gist of it, but am still unsure about a few things.

If I contribute as much as I can into an RRSP this year (within my contribution limit), I understand that I will get a tax credit for that amount for the tax year. However, do I continue to get a tax credit for that amount every year, or is it only a one time deal? If it's the latter, then what real benefits (other than a good interest rate) does having an RRSP have since you'll be taxed when it comes time to withdraw the RRSP?

Also, are there advantages/disadvantages to getting a registered GIC compared to an RRSP?

[AllWheelDrift]

Actually, you get a tax deduction, not a tax credit. Big difference here is with a tax deduction your marginal tax rate matters. You only get once but when you make a contribution you can carry forward the deduction to future years instead of claming it immediately. The assumption is your tax rate will be higher when you claim your deduction than when you retire, and that is the reason you expect to come out ahead by using RRSPs vs unregistered investments.

Also, an RRSP is an umbrella under which you make various investments. A "registered" GIC is simply a GIC purchased within an RRSP account. Don't be confused by the "RRSP" savings accounts. Within a full fledged RRSP you can also purchase stocks, bonds etc.

[br0pbr0p]

I've been trying to understand this over the past couple of days, and have read through some old threads, and I think I get the gist of it, but am still unsure about a few things.

If I contribute as much as I can into an RRSP this year (within my contribution limit), I understand that I will get a tax credit for that amount for the tax year. However, do I continue to get a tax credit for that amount every year, or is it only a one time deal? If it's the latter, then what real benefits (other than a good interest rate) does having an RRSP have since you'll be taxed when it comes time to withdraw the RRSP?

Also, are there advantages/disadvantages to getting a registered GIC compared to an RRSP?

RRSP is a reduction in income for the year, and that year only. This is the key benefit due to Canada's tax bracket structure. RRSP contribution can bring you into a lower tax rate (hence tax savings) and when you draw it out when you retire, you will be taxed at a lower rater (assuming you make less when you retire...most people do). That's where the tax savings come from.

On the other hand, if you are investing in GIC, you will be paying taxes on the income right away, at a presumably higher rate than when you are retired.

If you don't like RRSP, you can always consider TSFA. TSFA is virtually the same in RRSP in terms of financial sense. If you expect your tax rate to get lower when you retire, put your money in RRSP. If you expect your tax rate to increase in the future (i.e. just entering work force), put it in TSFA (and RRSP if you can afford both but don't deduct it yet).

[AirBosh]

This is probably a stupid question but this is the first time I'm deferring all my bonus to RRSP (hopefully 10-15K). Since I'm doing this I'm not going to gett taxed on my bonus (except for CPP).

The RRSP can still be filed for a deduction in income when I do my income tax right?

[rborek]

This is probably a stupid question but this is the first time I'm deferring all my bonus to RRSP (hopefully 10-15K). Since I'm doing this I'm not going to gett taxed on my bonus (except for CPP).

The RRSP can still be filed for a deduction in income when I do my income tax right?

You have to file for the deduction, or you are taxed on the amount you put into your RRSP. You don't get an additional deduction.

[The Reverend]

This is probably a stupid question but this is the first time I'm deferring all my bonus to RRSP (hopefully 10-15K). Since I'm doing this I'm not going to gett taxed on my bonus (except for CPP).

The RRSP can still be filed for a deduction in income when I do my income tax right?

By putting it directly into an RRSP avoids the taxes immediately. The tax benefit is realized right away. This won't translate into an income tax refund because its as if you get the refund right away.

This actually brings up another issue I've struggled with in the past. Its often argued that RRSPs aren't beneficial unless you use the refund wisely (mortgage paydown, investment, etc). I agree with this camp. My issue is that I make my RRSP contributions by payroll deduction so immediately realize the tax benefits. My net pay includes the "refund" if you like to state it another way. As a result, I never see the refund as an explicit amount that I can use wisely to make RRSPs work in my favour.

Surely if I spend wisely, it works out in the end but if i simply blow my paycheque, I would have been better off not making the contribution from payroll, receiving making the contribution after taxes, have less disposable income all year long, and then get the refund at tax time.

Any thoughts on this?