Every New Year, you’re allowed to make contributions to your RRSP during the first 60 days and claim it as a deduction in your income tax return for the previous year. For example, in 2018, you can make RRSP contributions (up until March 1, 2018) using your contribution room from 2017 or previous years, and claim it as a deduction in your income tax return for the 2017 tax year.
This is why the first 2 months of every new year is referred to as the “RRSP Season.” People try to catch up with RRSP contributions they have neglected over the last year because they do not want to miss out on the juicy tax refunds that will come in the mail after they have filed their tax return.
And, of course, they also remember that they need to save for retirement!
In previous articles, I discussed basics of the RRSP, and how to save on taxes by maximizing your RRSP contributions.
For a bit of background, RRSP is an acronym for Registered Retirement Savings Plan. You can contribute up to 18% of your earned income per year, up to a maximum limit – $26,230 for the 2018 tax year ($26,010 for 2017).
RRSP contributions can be claimed as a deduction in your income tax return and will result in a tax refund. The amount of refund you receive is based on your marginal tax rate. Money invested in the RRSP grows tax-deferred until withdrawal in retirement, and unused contribution room can be carried forward to future years.
As if there are not enough reasons to make you want to save for retirement, there is an additional incentive (if you have kids) for why you should consider making that RRSP contribution before March 1!
Enter the CCB!
Canada Child Benefit (CCB)
The Canada Child Benefit was introduced in the Federal Budget of 2016. The program was setup to replace the Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB). Like the CCTB (and unlike the UCCB), Canada Child Benefit payments are non-taxable.
Eligibility for CCB payments is based on a family’s combined net income. Maximum eligible annual benefits under the CCB are $6,400 per eligible child under age 6 and $5,400 per eligible child between 6 and 17 years. Families that have children with disabilities may receive an additional benefit of $2,730 per child for the disability tax credit.
The maximum benefit is received by a family with an annual net income less than $30,000. For net annual incomes between $30,000 and $65,000 and those above $65,000, there will be a clawback of the CCB based on the number of children as follows:
** percentage of clawback on net income over $65,000
For example, a family with 2 children under the age of 6 and a family net income of $29,500 would qualify for the maximum annual benefit of $12,800 ($6,400 x 2). If the same family had a net income of $60,000, there would be a clawback of 13.5% on the excess income over $30,000 i.e. ($60,000 – $30,000) x 13.5% = $4,050. Therefore, the family would receive a total CCB benefit of $8,750 (i.e. $12,800 – $4,050).
RRSP Contributions Are Considered A Deduction
RRSP contributions are treated in a way that highlights the difference between tax credits and tax deductions. While tax credits are calculated at the lowest tax rate (currently 15%), deductions will impact your income at your highest marginal tax rate. Additionally, because tax deductions lower your net income on line 236 of your tax return, they impact your eligibility for income-tested benefits at both federal and provincial levels.
Main deductions that lower net income on line 236 include:
- RRSP contributions
- Pension adjustments
- Childcare expenses
- Professional and Union dues
- Employment expenses
Are you seeing where I’m going with this?
Because RRSP contributions are considered a tax deduction on your income tax return, they lower your taxable income and can increase the amount of CCB payments you are eligible for!
Canada Child Benefit and RRSP Contribution Scenarios
For the scenarios below, I used the government CCB calculator here.
Family A with 3 kids all under 6 years of age and a family net income of $75,000. They make no RRSP contributions and can expect a total family CCB payment of $11,750 for the year. They can also expect to pay approximately $15,852 in taxes (Ontario).
Assumptions for scenario 1: no RRSP contribution made and no other pension plan contributions.
Family B with 3 kids under 6 years of age and a family net income of $75,000. If they decide to contribute $13,500 which is their full RRSP contribution room for the year (i.e. 18% x $75,000), their family net income falls to $61,500. They can expect a family CCB payment of $13,215, and will pay approx. $11,814 in taxes (Ontario).
Assumptions for scenario 2: full RRSP contribution made and no other pension plan contributions.
Because Family B made RRSP contributions for the previous year, their CCB payments increased by $1,465 for the year or $122/month. Additionally, they will save $1,401 in taxes and at a marginal tax rate of 29.65%, their RRSP contribution will also result in a tax refund of about $4,000.
The scenarios denoted above are somewhat simplistic. However, they clearly show that when it comes to income-tested benefits (such as CCB, GST/HST credit, etc.), there is extra money to be had if your taxable net income is as low as possible.
Saving for retirement is always a good thing! With RRSP contributions, you lower your taxes, get a refund and grow your retirement pot. The new Canada Child Benefit program is especially beneficial to low- and middle-income families. When you boost your RRSP contributions and increase the CCB you are eligible for, the extra funds received can also be used to build up a family RESP for your children’s future post-secondary education.
One last thing: it is important to determine what works best for your family when it comes to making RRSP contributions efficiently. For some individuals just starting out in the workforce and currently in a low tax bracket, it may make more sense to carry forward their RRSP contributions until when they are in a higher tax bracket. For some in a higher tax bracket, contributing to a spousal RRSP as a means of income-splitting in retirement may be the savvy thing to do.
- RRSP Over-Contribution: What are the Penalties?
- RRSP Transfers Explained
- Understanding the Canada Pension Plan (CPP)
- Understanding the RESP