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Let us say at the beginning of the year I put 5000 dollars in a TFSA account. I invest that money, get 5% and in December, I move the principal + interest = 5250 $ in my RRSP.

Now, RRSP contributions are tax deductible...so does that mean that I get to subtract 5250 $ from my taxable income that I made as a salaried employee?

Or is only the 5000 $ tax deductible?

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How would the RRSP know where the money came from?

You have two separate financial operations going on:

  1. You invest some money, within the limits set by the law, in a Tax Free Savings Account. Near the end of the year, you take the money, plus interest, out of the account. As you may guess by the name, you need not report the interest as income. There are no restrictions on the money, except that you can't put it back in the TFSA until the new year. The money is not segregated, or frozen, or marked with an exploding dye-pack. It's just money in your regular bank account, or your pocket, or under your mattress.

  2. During that year, you also work for a salary. Some is deducted from your salary to prepay your tax responsibilities, subject to a final calculation . You spend some and save some. The money you save also goes into your bank account, your pocket, or under your mattress. You can even take some of your money from your chosen repository and put it in a RRSP, which postpones the need to pay tax on the original deposit and on any earnings on the deposit. The money you take has lost all sense of identity: it isn't TFSA money or salary, or paper route money, or twelfth birthday money. It's just money...

  • Nice and clear, definitely worth my +1. – ChrisInEdmonton Dec 24 '14 at 14:30

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