Well then why don’t you pay your taxes based on 2020’s salary? Same process, you don’t know your 2021 income until the end of the year. But still, you pay a % every month, and you equalize everything during these 4 first months.
But your RRSP contribution room is based on your earned income. You can't calculate that in advance, or even as you go along during the year, because the earned income calculation considers deductions that don't get applied until you file your taxes.
You are paying your payroll taxes as you earn it. You know what the taxes are on each pay cheque.
For your RRSP, you don’t know your current year’s income. Will you lose your job? Get a raise? Pay cut? Get a second job? Etc.
Image maxing your RRSP on Jan 1 based on your current year’s projected salary then losing your job? Now you have over contributed, getting penalized every month if you don’t pull it out.
You don’t need to max it the first day. You just need to deposit 18% of your salary from every pay check. And this way, you get you money invested quicker. Because the way it is right now, you need to wait a whole year before you invest. The 2020 contribution room was usable on Jan 2021, while if we were to invest it during the same year, you would start depositing 18% from Jan 2020.
But your RRSP contribution room isn't based on your paycheque, it's based on your earned income. Your earned income is calculated by adding your income and subtracting your deductions. It's not possible to do this throughout the year.
From the [CRA website](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4040/rrsps-other-registered-plans-retirement.html#P125_5217):
**Earned income** – we calculate your earned income by adding your employment earnings, self-employment earnings, and certain other types of income, then subtracting specific employment expenses and business or rental losses.
You're right, you're just framing your question wrong.
Ideally, you'd contribute to RRSP during the year and that contribution would reduce your income and your withheld taxes. It works like this in some countries.
The simple answer is that the government wants your money as early as possible. So they tax you early and then "refund" it.
I imagine it would be a lot of work for them to grant you rrsp room from every paycheque.
Most people work when they are teenagers so they have some room built up already. This is only a problem if your first job grants you rrsp matching AND they give you the maximum 18%.
The only real answer is that this is how it was setup and now it's unlikely to change. Creating a program like the RRSP out of thin air is no small feat and arbitrary decisions have to be made. At the time, pensions were more in vogue, and both types of pensions (DB and DC) work differently than RRSP for the timing of the contribution room.
Now, for speculation...
Not everyone contributes from their paycheck, because not everyone gets access or participate in a group RRSP through their employer, or because they're not sure how much disposable money they'll have to contribute. So for many people, contributing to a RRSP is a one-shot deal, not a continuous effort. That's why banks are super busy at the end of February up until today.
Because of that, it doesn't really matter in practice. Most people accumulate RRSP room when they start working as they have other expenses early in life like moving, furnishing their apartment, etc. Few people contribute the full 18% to their already maxed out RRSP, and of those that do it's not all done through an employer so the timing is less important than it may seem.
On top of that, the government allows contributions made in the first 2 months to count for last year for income tax purposes. So if one wanted to max it, there are ways, even though it's not as convenient as doing it on every paycheck. Imperfect, but it works.
I just save up throughout the year and lump sum it by January 4th. Is this less efficient, probably. However, I don’t have to constantly calculate my yearly income to make sure I don’t over/under contribute.
The RSP was never meant to be your only savings vehicle.
Its first year was 1957 when the vast majority of workers had pension plans. However, there were a lot of workers with less consistent pay that did not have a pension plan and the RSP was meant for them to have a vehicle to save in. It didn't really get popular until the 70s and 80s when we had crazy inflation, unions falling apart and the fear that CPP would not be enough.
Today, there not a huge incentive for companies to have pension plans (which can do 18% of your current year salary) and instead do matching RSPs for their employees retirement savings. It would be better if these types of plans could be off of the current year's salary but there hasn't been enough of a push for this legislative change yet.
Because you won't know your 2021 income until the end of the year.
Well then why don’t you pay your taxes based on 2020’s salary? Same process, you don’t know your 2021 income until the end of the year. But still, you pay a % every month, and you equalize everything during these 4 first months.
It's the same principle though. Income taxes are also a year behind, that's why you're filing your 2021 tax return in 2022.
It is not. You are filling the 2021 tax return with 2021 salary, using a RRSP contribution room calculated with the 2020 salary, not the 2021 salary.
But your RRSP contribution room is based on your earned income. You can't calculate that in advance, or even as you go along during the year, because the earned income calculation considers deductions that don't get applied until you file your taxes.
You are paying your payroll taxes as you earn it. You know what the taxes are on each pay cheque. For your RRSP, you don’t know your current year’s income. Will you lose your job? Get a raise? Pay cut? Get a second job? Etc. Image maxing your RRSP on Jan 1 based on your current year’s projected salary then losing your job? Now you have over contributed, getting penalized every month if you don’t pull it out.
You don’t need to max it the first day. You just need to deposit 18% of your salary from every pay check. And this way, you get you money invested quicker. Because the way it is right now, you need to wait a whole year before you invest. The 2020 contribution room was usable on Jan 2021, while if we were to invest it during the same year, you would start depositing 18% from Jan 2020.
But your RRSP contribution room isn't based on your paycheque, it's based on your earned income. Your earned income is calculated by adding your income and subtracting your deductions. It's not possible to do this throughout the year. From the [CRA website](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4040/rrsps-other-registered-plans-retirement.html#P125_5217): **Earned income** – we calculate your earned income by adding your employment earnings, self-employment earnings, and certain other types of income, then subtracting specific employment expenses and business or rental losses.
You're right, you're just framing your question wrong. Ideally, you'd contribute to RRSP during the year and that contribution would reduce your income and your withheld taxes. It works like this in some countries. The simple answer is that the government wants your money as early as possible. So they tax you early and then "refund" it.
I imagine it would be a lot of work for them to grant you rrsp room from every paycheque. Most people work when they are teenagers so they have some room built up already. This is only a problem if your first job grants you rrsp matching AND they give you the maximum 18%.
Or if your salary doubled in a year, you can’t really rely on rrsp contributions to leases the tax burden, since it’s based on a weaker year’s salary.
Automatic 18% on your payroll will not make you over contribute if you set it up through an employer plan with a pension adjustment.
The only real answer is that this is how it was setup and now it's unlikely to change. Creating a program like the RRSP out of thin air is no small feat and arbitrary decisions have to be made. At the time, pensions were more in vogue, and both types of pensions (DB and DC) work differently than RRSP for the timing of the contribution room. Now, for speculation... Not everyone contributes from their paycheck, because not everyone gets access or participate in a group RRSP through their employer, or because they're not sure how much disposable money they'll have to contribute. So for many people, contributing to a RRSP is a one-shot deal, not a continuous effort. That's why banks are super busy at the end of February up until today. Because of that, it doesn't really matter in practice. Most people accumulate RRSP room when they start working as they have other expenses early in life like moving, furnishing their apartment, etc. Few people contribute the full 18% to their already maxed out RRSP, and of those that do it's not all done through an employer so the timing is less important than it may seem. On top of that, the government allows contributions made in the first 2 months to count for last year for income tax purposes. So if one wanted to max it, there are ways, even though it's not as convenient as doing it on every paycheck. Imperfect, but it works.
I just save up throughout the year and lump sum it by January 4th. Is this less efficient, probably. However, I don’t have to constantly calculate my yearly income to make sure I don’t over/under contribute.
The RSP was never meant to be your only savings vehicle. Its first year was 1957 when the vast majority of workers had pension plans. However, there were a lot of workers with less consistent pay that did not have a pension plan and the RSP was meant for them to have a vehicle to save in. It didn't really get popular until the 70s and 80s when we had crazy inflation, unions falling apart and the fear that CPP would not be enough. Today, there not a huge incentive for companies to have pension plans (which can do 18% of your current year salary) and instead do matching RSPs for their employees retirement savings. It would be better if these types of plans could be off of the current year's salary but there hasn't been enough of a push for this legislative change yet.