The Feb. 29 deadline for making 2023 RRSP contributions is days away. Canadians are likely familiar with the income tax savings available from making a contribution to their Registered Retirement Savings Plan. But many may not be familiar with the effects of RRSP contributions on income-tested benefits.
Canadians should consider both when deciding whether an RRSP contribution is right for them.
Let’s first review the income tax savings aspect. An RRSP contribution can be used to lower one’s taxable income. For example, a person with income of $75,000 who makes a $5,000 RRSP contribution is able to subtract the contribution from their income and pay tax as though they only earned $70,000.
The tax savings vary depending on your province of residence. In this scenario, the person’s savings would range from a low of $1,375 in Nunavut to a high of $1,859 in Nova Scotia. An Ontario taxpayer would save $1,483 while a Quebec taxpayer would save $1,806.
Now, let’s add the effect of one income-tested program to our analysis. The Canada Child Benefit (CCB) is paid to eligible parents of children 17 and under. For children five and under, the payment is up to $7,437 per child per year. For children aged six to 17, the payment is up to $6,275 per child per year.
The benefit is described by the government as a “tax-free monthly payment.” However, the benefit is reduced as a family’s income goes up, which makes it similar to taxable income.
Let’s take our hypothetical taxpayer from above and assume she is the parent of two young children ages two and four. Her partner stays home to look after the kids.
The first step to calculating her Canada Child Benefit is to look at the age and number of her children. Two children six or under could lead to a maximum benefit of $14,874. However, with her income of $75,000, this benefit would be reduced to $9,455.
Now here’s where the RRSP contribution can be helpful. If this taxpayer made a $5,000 RRSP contribution, not only would she save on her income taxes, but her Canada Child Benefit clawback would be reduced, effectively increasing the amount of the benefit.
By how much?
At $70,000 of taxable income, our taxpayer would be eligible for CCB of $10,130 – an annual increase of $675.
The effect is more pronounced for parents with a greater number of children. If our taxpayer had four children, she could see an annual CCB increase of $1,150.
The Canada Child Benefit is just one income-tested benefit to consider when making RRSP contributions. There are other federal benefits, such as the HST/GST credit and Canada Worker Benefit, and numerous provincial benefits that are determined by your taxable income.
When factoring in the effects of these clawbacks, Canadians at lower income levels can see combined taxes and benefit reductions similar to those in the highest tax brackets (individuals making more than $220,000 per year).
A resource that has assembled these programs in one location is www.rrspcontribution.ca.
As always, speak to a tax advisor or financial planning professional for personalized advice.
