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Retirement Savings:  Demystifying RRSPs

Retirement Savings: Demystifying RRSPs

RRSP block letters are placed on top of Canadian hundred dollar bills.

Retirement savings are essential for all Canadians to live comfortably after they retire. And the earlier you start saving, the better. For newcomers, understanding retirement savings options can be confusing. So in this article, I’ll demystify the Registered Retirements Savings Plan (RRSP). With a clear understanding, you can start saving as soon as possible to achieve your dreams and goals in Canada!

What is a Registered Retirement Savings Plan?

An RRSP is a tax-deferred retirement savings plan. This plan encourages you to save in your earning years so that you can have income in your retirement years.

The term “tax-deferred” means that when you open an RRSP and contribute to it, you can claim a deduction from your income. And any income earned in the RRSP remains tax-free unless you make a withdrawal from your RRSP. In other words, you defer or delay taxes until the time you make any withdrawal. Therefore, you can defer income taxes until later when you may be subject to lower taxes as your income goes down.

During the years when you earn a high income, you are subject to higher tax rates. So, contributing to an RRSP will help you lower your tax liability. 


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Am I Eligible to Open an RRSP?

You are eligible to open an RRSP if you satisfy these conditions and you:

  • Have “earned income” from the previous tax year
  • Reported the earned income to the Canada Revenue Agency (CRA) on your tax return
  • Have not yet turned 71 years of age.

Can I Open More than One RRSP?


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You can open multiple RRSP accounts. However, it will be easier to manage one RRSP account rather than tracking several accounts.

How Do I Set Up My RRSP? Do I Need to go to My Bank?

You can set up an RRSP through a:

  • Bank
  • Credit union, or
  • Trust or insurance company.
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How Much Can I Contribute to My RRSP in the Current Year?

Computing the maximum RRSP contribution for the current year involves four steps.

STEP ONE:

Calculate 18% of the income you earned in the previous tax year. Add the following income to determine your earned income:

  • Your employment income. Calculate this as taxable benefits minus union or professional dues.
  • Net amount of rental income from renting real property. No other property income will be considered in computing earned income.
  • Net amount of self-employment income.
  • Research grants received or royalties received from your own invention or published work.
  • Spousal support payments (alimony/maintenance) received due to a court order.
  • Canada Pension Plan or provincial disability pension plan income received.
  • Supplementary employment insurance benefits that the employer pays to you. A good example is the top-up payments (i.e. the difference between your salary and the amount that is paid by employment insurance) that your employer may pay during maternity or parental leave. Do not count any employment insurance benefits that you received from Employment and Social Development Canada (ESDC).

Less: Spousal support payments made.

No other income or capital gains will be considered as earned income for an RRSP. 

Now multiply your earned income by 18%.

STEP TWO:

Visit www.canada.ca to find out the contribution limit for the current year.

In 2024, the website shows that the annual RRSP contribution limit is $30,780 (for tax year 2023).

STEP THREE:

Compare 18% of your earned income for the previous tax year as computed in step one and the annual contribution limit determined in step two.

Take the lesser of these two amounts.

STEP FOUR:

To the lesser amount that you determined in step three, add unused RRSP contribution room from the previous years that were carried forward to the current year.

Now, subtract the:

  • Previous year’s pension adjustment (PA)
  • Current year’s past service pension adjustment (PSPA). 

Now, you have arrived at your maximum RRSP contribution for the current year. The maximum RRSP contribution is also known as:

  • Contribution room
  • RRSP deduction limit, or
  • Deduction room.

What Does Pension Adjustment (PA) Mean?

If you participate in a registered pension plan or a deferred profit-sharing plan, you earn pension benefits. This is the amount of PA.

What is Past Service Pension Adjustment (PSPA)?

In simple terms, PSPA is the amount of extra pension credits you get when either there is:

  • An upgrade in your pension benefits or
  • A pension buyback.

In a pension buyback, you pay a fixed amount to purchase years of missed pensionable service to enhance your retirement pension. For example, you can miss pensionable service years when in your earning years you: 

  • Took a leave of absence or time off your work or
  • Deferred the decision to join your employer’s pension plan.

Thereby losing the opportunity to accumulate years of service in the pension plan.

The amounts of PA and PSPA go on to reduce your maximum RRSP contribution amount for the current year. 

How Do I Calculate the Maximum Registered Retirement Savings Plan Contribution?

Let’s say you want to determine your maximum RRSP contribution for 2023 and you earned:

  • $90,000 in employment income and
  • $1,000 in taxable capital gains in the previous tax year (i.e. 2022).
  • At the beginning of 2023, you have unused RRSP contribution room from previous years that total $7,000.
  • As a member of a registered pension plan, your pension adjustment for 2023 amounts to $3,000.

To compute the maximum RRSP contribution follow these four steps:

STEP ONE:

Compute 18% of your earned income. In your instance, earned income will be $90,000. Taxable capital gains are disregarded while computing earned income. Thus, 18% of your earned income = 0.18 x 90,000 = $16,200.

STEP TWO:

On www.canada.ca, you find the RRSP dollar limit for 2023 is $30,780.

STEP THREE:

Take the lesser of the above two amounts. The lesser amount = $16,200.

STEP FOUR:

To $16,200, add the unused RRSP contribution of $7,000 and subtract your pension adjustment amount of $3,000.

So, your maximum RRSP contribution = $16,200 + $7,000 – $3,000 = $20,200.

Can I Make Excess Contributions?

Let’s take the above example. Since we worked out that your maximum RRSP contribution is $20,200, this is the maximum that you can contribute in the current year (in this case, 2023).

You contribute an excess amount of up to 2,000 without any penalty. But, any amount beyond $2,000 will be subject to a penalty of 1% of the excess beyond $2,000 for each month (or part of the month) that this excess contribution exists. For example, if your maximum RRSP contribution is $20,200, you may contribute:

$20,200 + $2,000 (excess amount not subject to penalty)

However, if you contribute, say, $23,200, there will be a penalty as computed below.

Split the amount of $23,200 as shown:

1. $20,200. This will not attract any penalty.
2. An excess amount of $2,000 which escapes any penalty.
3. An excess amount of $1,000 (which is beyond the excess amount mentioned in 2 above). This excess of $1,000 will attract a penalty of 1% for every month (or part of the month) that it remains in the RRSP.

Thus, you will pay $10 (i.e. 1% of $1,000) as a penalty for each month or part of the month that this amount remains in the RRSP. 

If you make an excess contribution, make sure to withdraw it immediately to reduce the penalty as much as you can. Besides, you are not allowed to deduct from income any excess contribution. It, therefore, helps to avoid making excess contributions in the first place.

Is There a Deadline to Make Registered Retirement Savings Plan Contributions?

Yes, the deadline to make an annual RRSP contribution is typically at the end of February or early March for the preceding tax year. For the 2023 tax year, the deadline to make an RRSP contribution is Thursday, February 29, 2024. Most banks send deadline reminders so that you take advantage of this tax-saving benefit.

Are RRSP Deposits Insured?

If your financial institution goes out of business, the Canada Deposit Insurance Corporation (CDIC) insures up to $100,000 in deposits in seven categories.

The CDIC covers insurance up to $100,000 for the RRSP deposit category. Additional information on this is available at www.cdic.ca

What about Withdrawals from the RRSP?

You can withdraw RRSP funds at any time. But any funds that you withdraw will be added as taxable income for the year that you withdraw funds. In other words, you will not get a tax break when you withdraw funds.

Can I Withdraw RRSP Funds to Buy a House or Pay for Education?

Two plans allow you to withdraw RRSP funds without being subject to taxes or interest:

1. Home Buyers’ Plan (HBP)


2. Lifelong Learning Plan (LLP)

However, both of these plans require you to pay back the amount that you withdraw. You must pay back the funds that you withdraw each year so that the amount that you withdraw for the HBP is paid within 15 years for the HBP and 10 years for the LLP.

When you withdraw RRSP funds for either program you will lose the tax-deferred income that you could have made on the amount that would have remained within your RRSP. Moreover, if you’re unable to pay back the annual dues, they get added to that year’s income and you’ll need to pay taxes on that amount.

What Happens When My RRSP Matures?

Retirement savings demystifying RRSPS

While you can withdraw from or register the RRSP at any time, you must deregister it by the end of the calendar year in which you turn 71. At that point, you have three options:

1. Transfer your RRSP proceeds to a registered retirement income fund (RRIF). Click here to learn more about RRIFs.


2. Withdraw the RRSP proceeds and pay taxes on the same in the year that you receive the proceeds.


3. Use the RRSP proceeds to purchase eligible annuities.

Can I Name a Beneficiary?

A beneficiary is a person your RRSP funds will go to if you die before your RRSP matures. You can name anyone of your choice as a beneficiary of your RRSP. However, from the tax deferral standpoint, it is better to name the following:

  • Your spouse or common-law partner
  • A child or a grandchild who is under 18 and is financially dependent on you at the time of your death
  • A child or a grandchild who is mentally or physically informal and is financially dependent on you at the time of death. Age is irrelevant in this case.

What is a Spousal RRSP? How Does it Work?

Let’s say you make more money than your spouse (or common-law partner) does. And you know that the maximum RRSP contribution limit is restricted by your earned income.

If your spouse makes less money than you do, then the amount they can contribute to their personal RRSP will be lower. However, you’re able to make greater contributions to your own RRSP.

Now if you expect that your spouse’s earnings will continue to be lower than your earnings in the future, it makes sense to contribute more to a spousal RRSP. As well, if you withdraw funds from a spousal RRSP you will pay a lower tax rate on those funds.

Your contribution to the spousal RRSP will be limited by your personal limit. But because you make the contribution, you get to claim this as a deduction.

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In summary, an RRSP can be a great way to save for your retirement in Canada. When you understand the financial benefits of an RRSP you can begin to save sooner and benefit from an early start.

How to Manage Your Personal Finances When You’re New to Canada

How to Manage Your Personal Finances When You’re New to Canada

For newcomers, carefully managing your finances is vitally important, especially if you have not yet landed your ideal job. And, settlement agencies suggest that it can take up to six months to land a job that matches your skills and experiences. In the meantime, managing your finances and spending can serve to reduce stress and financial pressure. In addition, managing your finances well will help you build your Canadian credit history and influence your credit score. Here, we’ll explore how you can create a budget for some of the main expenses you will have to cover in Canada. So where to start, which is essential to achieving future loans! You need to establish your Canadian credit history because it will be important for many reasons including buying your first home.

One of the most important factors in your financial situation is not how much you earn, but rather how much you spend. But, many Canadians get caught in too much debt, trying to “keep up with the neighbours” — in other words, buying everything you want, from cars to electronics, even if you can’t afford it. Overspending can get you caught in a trap that you want to avoid.


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Create a Budget to Manage Your Personal Finances

To manage your personal finances, you can prepare a budget. with the following costs in mind. But the cost of living in Canada depends greatly on the city in which you choose to settle and on the size of your family. Large cities attract the bulk of new immigrants and offer the most job opportunities, however, living costs are also higher. Here are some of the basic expenses that you can keep in mind to help you manage your finances:

Rent Payments


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Newcomers often rent an apartment as their first means of accommodation. Typically, rent prices for a small one-bedroom apartment begin at $700 and can be as high as $2,500 per month depending on the city you choose to settle in.

When renting, make sure that you conduct thorough research on the apartment building and its surroundings and then outline the positives and negatives to see if it is the right place for you. Perhaps the property is close to amenities like shops, swimming pools, libraries, and public transport which depending on your requirements may make it an attractive option for you.

Our Rentals for Newcomers site is a practical and easy-to-navigate site that can help you find housing that meets your unique needs! And you can even determine the average costs of rentals in cities across Canada. This is helpful since rental prices change often. You’ll also find some helpful articles related to housing in Canada.

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Utility Bills

You will need to budget for the cost of utilities such as electricity (hydro), heating, telephone, cable, and internet.

Many rentals include heating and some include even hydro in the cost of the rent. If you have to pay for electricity, you can ask the landlord what you expect to pay every month. But, your bill will also depend on usage and time of day.

When it comes to internet, cable, and telephone, the best option is to shop for bundles (combined service plans) from different telecom providers in your area. A bundle can cost anywhere between $60 per month to more than $100 per month. Or, check out streaming services that can be less expensive than cable television.

Cell phone plans range from $15 per month to more than $150, depending on the number of free minutes and text messages and the data usage limits. Voicemail activation usually costs extra. You can start with a basic plan and upgrade according to your needs.

While not a bill per se, the cost of doing laundry will be similar from one month to the next. Apartment buildings come with laundry rooms with coin or card-operated washing machines. A washing cycle costs between $2.25 to $3.50 depending on the length, and a dryer cycle has a similar cost.

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Insurance

Even if you are renting, it’s a good idea to purchase renter’s insurance to protect you against damage and theft. The insurance can cost up to a few hundred dollars a year. Auto insurance is $1,000 or more a year.

Depending on your province, you may also have to pay health insurance premiums, which vary from province to province and according to the size of your family. You will also need to factor in the premiums for any private health insurance you may choose to buy.

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Public Transit

A streetcar travelling along King St. in downtown Toronto at night.

Public transit is probably the most affordable to travel within your city. And, all cities offer affordable travel options such as buses, trains, subways, light-rail trains, and streetcars. A monthly transit pass can cost anywhere between $70 to more than $150 depending on the city and the number of travel routes that it covers. In large cities, such as Toronto, the public transit system covers the broader Greater Toronto Area, and you can easily transfer from one mode of transportation to another.

To use public transit, you can purchase individual tickets starting at $2.50, but you can use a transfer at the start of your destination to transfer to different modes of transportation. In other words, you only have to pay once at the start of your destination. You can also buy transit passes that allow you unlimited transit use for a period of time. Some cities offer an electric fare payment system that allows you to load money onto a card to make travelling easier and at a discounted fare.

You can find specific fare information about public transit in your city by visiting the website of your city government, or the public transit system.

Food and Other Groceries

The cost of your food bill will depend largely on your dietary limitations and personal standards, but also on the area in which you live. The stores and supermarkets in popular posh areas will be more expensive and will offer more high-quality gourmet and organic products, while cheaper areas will have more low-cost options. Food can set you back anywhere from $100 per month for a single person to several hundred. Cooking at home and planning your meals will help to balance cost and nutrition.

In terms of personal care items and other supplies, costs can start at $1 at dollar stores, but you will often have to compromise on quality. Supermarkets have their own store brands that are usually cheaper than name brands and, in many cases, of comparable quality.

Clothing

Again, your personal standards will have the final say when it comes to clothing. You should bring with you quality items that will last you for a while because clothes shopping is best kept until after you find employment. You can pay anywhere from a few dollars for an item of clothing at a cheap retailer or a thrift (second-hand) store to hundreds and even thousands at high-end designer stores. Read more about the types of clothing you’ll need in Canada.

Entertainment

Movie tickets can cost from $7 to $15 depending on the movie and the time of day. Most theatre tickets usually start at $20, and concerts of popular performers can cost well over $100. You can take advantage of local libraries to borrow DVDs and look for community theatres with free performances or performances by donation. It’s important to budget for entertainment, but this may be a personal finance area that you can cut back on if necessary.

Other Personal Finance Expenses

Big cities can be very tempting with their variety of cultures and cuisines, so you will probably want to treat yourself and your family to occasional restaurant outings. The costs can be anywhere from a few dollars per person at fast-food restaurants, to more than $50 per person at an average restaurant. Never forget to factor in the tip, which should be at least 15 to 20 percent of the bill.

Staying fit and healthy should always be a priority. Some rental buildings come with their own gyms and the price may be very low or included in the rent. If you plan to subscribe to a gym, always read the fine print. The monthly cost is usually $60 to $100, but most gyms charge introductory fees and substantial cancellation fees.

Personal care costs also cover the range from basic to luxury. Expect to pay at least $25 for a simple haircut (plus tip) and anywhere from $40 to $60 for a manicure.

If you’ve recently arrived in Canada, managing your personal finances carefully will help you to reduce financial stress until you find your first job. And, the strong personal finance habits that you follow during your first year in Canada will help you to achieve many of your long-term financial goals.

How Much Money Will I Need to Move to Canada?

How Much Money Will I Need to Move to Canada?

Picture of Canadian currency in different denominations. An important question to ask is "How much money will I need to bring to Canada?"

How much money will I need to move to Canada? The answer to this important question really depends on the size of your family. Applying to become a permanent resident (PR) in Canada can be a long process that includes showing proof of funds to the Canadian visa office in your home country. Proof of funds shows that you have the minimum amount of settlement funds to support you and your family (even if your family will arrive at a later date) when in Canada. Discover how you can meet proof of funds requirements for Express Entry, the steps to take, minimum amounts, and documents (i.e. proof of funds letter) you’ll need.

Steps to Show Proof of Funds for Express Entry

Step One: Determine the minimum amount you require to show proof of funds for PR in Canada

You must show that you have enough money to settle in Canada and to cover living expenses such as housing, food, transit, and other costs. Depending on which city you settle in, living in Canada can be quite expensive. To reduce financial pressure, ideally, you should have enough money to cover expenses until you land a job in Canada.


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Step Two: Assess your financial situation

Once you know the minimum amount of settlement funds you’ll require, you can assess your current financial situation. Consider how much money you have in savings, investments, cash, etc. You may discover that you need to improve your financial situation so that you can easily show that you meet the minimum requirements. Or, you may find that you’re in a great financial position with suitable settlement funds while you get your fresh start in Canada!

Step Three: Contact your financial institution to obtain a proof of funds letter and other documents


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If you are invited to apply for permanent residence, you need to provide proof that you have the minimum amount of funds available. These funds must be money that you can readily access. Your bank will need to provide a proof of funds letter that is written on the bank’s letterhead and includes the following:

  • The bank’s contact information
  • Your name
  • all outstanding debts such as credit card debts and loans
  • Account number, the date the account was opened, current balance, and average balance for the last six months for each bank and current investment account.
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How Much Money Will I Need for Proof of Funds?

Before you move to Canada, you need to show that you have the minimum amount of settlement funds set by IRCC. Known as proof of funds, this shows the Canadian government that you have enough money to settle in Canada and cover living expenses. Each year, the government updates how much money you will need to bring to Canada. As of April 2023, you must show that you meet the minimum amount of settlement funds:

Number of Family MembersFunds Required (Canadian Dollars)
1$13,757
2$17,127
3$21,055
4$25,564
5$28,994
6$32,700
7$36,407
For each additional family member$3,706
The amount of settlement funds you require depends on the size of your family.

Who Needs to Show Proof of Funds?

You must show proof of funds if you are applying using the:

  • Federal Skilled Worker Program
  • Federal Skilled Trades Program.

However, you do NOT have to show proof of funds if you:

  • Are currently working or authorized to work in Canada, OR
  • Have been invited to apply for the Canadian Experience Class.

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Tips to Obtain and Maintain Proof of Funds for Canada PR

  • Update your Express Entry Profile if there is a change in your settlement funds. You need to keep your profile updated to maintain your eligibility.
  • Avoid unnecessary spending to ensure that you have the minimum amount of funds available and that you can access the funds easily.
  • Maintain a financial buffer to allow you to meet any unexpected expenses or fluctuations in the exchange rate

How Much Money Can I Bring to Canada?

While you must meet the minimum amount of proof of funds, you can bring as much money as you wish to make it easier to move to Canada and find a home.

Note, however, when you cross the border and enter Canada, Canadian customs regulations require you to declare if you are bringing more than C$10,000 into Canada. You may be fined or imprisoned if you do not tell them. To avoid this, declare how much money you are bringing and expect to pay duty (a fee) on the amount greater than $10,000 Canadian. These funds could be in the form of:

  • Cash
  • Stocks, bonds, debentures, treasury bills, etc.) or
  • Bankers’ drafts, cheques, travellers’ cheques, or money orders.

How Much Money Do I Need to Settle in Canada? 

Beyond the minimum funds that you require, it’s helpful if you can exceed the minimum. Having more money will help you to settle in Canada with ease and reduce financial pressure. It’s a smart idea to research the cost of living in the city where you plan to settle. The additional amount of funds that you require will vary based on:

  • Your family size.

Consider any additional financial needs that you and your family may have. Each family will have different financial needs. Also, it’s a good idea to research how much things cost in the city where you plan to live.  Here are some basic guidelines to help you assess how much you may need (costs do not include airfare or moving expenses):

  • One adult moving alone: $25,000 CDN
  • One couple moving together: $30,000 CDN
  • A couple with one child under 10 years: $33,000
  • A couple with a child over 10: $35,000
  • For each additional child under 10: add $1,000
  • For each child additional child over 10: add $2,000

Basically, these guidelines will provide you with breathing room to settle in Canada with financial ease. And depending on how well you budget, this should be enough money to cover basic living expenses for four to six months while you are searching for a job.

Researching the Cost of Living in Canadian Cities

Canada is a large country with regional, cultural, and economic differences. So, be sure to research and compare the cost of living in different cities to get a general idea of how much additional money you will need to settle. Also consider that once you arrive, it may take you some time before you find a job.

Settlement and employment experts suggest that it can take up to six months to find employment. In that case, having enough money to cover living expenses for several months can reduce financial stress.

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To give you an idea of living costs, here are the average costs for rental housing, utilities, and some basic goods and commodities in Toronto, Vancouver, and Calgary (all prices are in Canadian dollars):

Housing & Utilities
Per Month
TorontoVancouverCalgary
1 Bedroom apartment in the city centre (rent/month)$2,535.11$2,666.06$1,729.05
Basic utilities (electricity, heating, cooling, water)$202.14$148.97$323.72
Internet (60 Mbs or more, unlimited data, cable)$73.51$87.88$94.25
Average cost of rental housing and utilities as of Aug 2023. Source Numbeo
TransportationTorontoVancouverCalgary
Public transit (monthly pass)$156.00$120.00$112.00
Gasoline (1 litre)$1.55$1.88$1.38
Taxi (normal tariff)$4.62$4.00$4.50
Average cost of some typical transportation costs as of Aug 2023. Source: Numbeo
Food
(Restaurants & Market)
TorontoVancouverCalgary
Meal,
inexpensive restaurant
$22.00$29.00$23.65
Meal for 2 people
mid-range restaurant
$120.00$100.00$100.00
Domestic Beer (Restaurant)$8.00$8.00$7.50
Milk (1 litre)$3.69$3.03$2.57
Rice (1 kg)$4.53$5.11$4.14
Chicken fillets (1 kg)$16.42$17.77$15.40
Eggs (12)$4.58$5.98$4.27
Apples (1 kg)$5.34$5.24$5.25
Average cost of food as of Aug 2023. Source: Numbeo

For current rental prices in cities across Canada visit Rentals for Newcomers.

Showing proof of funds for PR in Canada is a vital part of the immigration process. If you or a family member is planning to move to the country in the near future, plan to meet or even exceed the minimum funds that you require. It will make your application process easier and serve to reduce financial pressures when you arrive in Canada.

Learn more about financial first steps in Canada by visiting our Banking in Canada resource page. Get essential information to manage your finances in Canada before and after you arrive!

Working with a financial planner

Working with a financial planner

Couple talking with a financial planner

If you have the possibility to make substantial investments, you may want to enlist the assistance of a certified financial planning professional. You may not be knowledgeable about the complicated world of modern finance or you may not have time to dedicate to research.


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Safety Deposit Locker

Safety Deposit Locker

Key with safety deposit locker

Safety deposit lockers are secured containers kept in a bank’s vault. They can have different sizes and renting costs.


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If you plan to bring with you very expensive items such as gold, jewellery, gemstones, collectables or anything you deem valuable enough to require extra protection, you have the option of renting a safety deposit locker in a Canadian bank. People often use them to store wills, bonds, property deeds, originals of important documents and even sensitive computer data, and film negatives.


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