Tax Tip #2 – RRSP’s – A Business Owner’s Best Friend

pink piggy bankThe RRSP Deadline for 2010 was March 1st, so if you haven’t already contributed,  you can’t for last year.  But this year is a whole other story….
For business owners, an RRSP is your only pension fund.  There is no large corporation ensuring you have funds at your retirement.  You are that corporation and RRSP contributions are essential to self-employed individuals unless you want to rely only on the Canadian government to look after you in your retirement.  Although there has been great debate in recent months as to whether or not RRSP’s are as beneficial as they were years ago, RRSP isn’t just about tax reduction, it is also about financial planning.  Planning for your retirement.
For self employed individuals or business owners, the RRSP also allows you to smooth out your income and defer some income into a future year.  For example, if you contributed money to your RRSP in 2010 and withdraw it in this year,  the tax consequence of that contribution is that you reduced your taxable income for 2010 and will increase your taxable income for 2011.  Therefore, if you earned $100,000 in 2010 and are expecting that your 2011 income will only be $60,000, this strategy allows you to smooth out your income stream and defer some income from 2010 to 2011 when you are in a lower tax bracket.
I would be interested to hear from business owners as to whether they use their RRSP’s as an income deferral tool, as a tax reduction strategy, or whether you have an opinion on the effectiveness of RRSP’s.
Copyright: olegdudko / 123RF Stock Photo

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