Tax Tip: Three Tax Secrets for RRSP Investors

March 1, 2018 is an important date for savvy taxpayers: don’t miss topping up your RRSP contribution by this deadline. It’s a great investment for your retirement, of course, but it’s so much more powerful: there are, in fact, three additional tax secrets most people don’t know about that can help you improve your finances.

First, your RRSP accumulations will provide valuable options for lifelong learning and for homebuyers, too, as you can withdraw funds for those purposes on a tax free basis, as long as you pay the money back into the RRSP annually, according to CRA’s schedule.  Check out the Lifelong Learning Plan and the Home Buyers Plan for details.

The third secret is all about your net income (line 236 of the T1 return).  Because your RRSP deduction will reduce your net income, you will increase your cash flow—all year long from refundable tax credits and social benefits you may qualify for. Here’s what you need to know.

Net income, Line 236 on your tax return, is the income-testing level used to determine the size of some of the non-refundable tax credits a taxpayer is entitled to. The RRSP will reduce that number so you get more.  Your non-refundable tax credits can be found on Schedule 1 of the T1 return. Check out the entire list of them by printing this form from CRA’s website.

In real dollars, non-refundable tax credits are worth 15 percent of their value as an offset to the federal taxes payable. Their value is higher than that, though, depending on where you live, as they offset provincial taxes, too. Provinces have discretion on what tax credits they offer their residents, so check out what non-refundable tax credits your province allows as the list may be different from the federal schedule.  So to benefit, you must have taxable income.

Not so with refundable tax credits, like the Canada Child Benefit or the GST/HST Credit.  Even people with no income should file for them.  But if you have net income, the RRSP can help to reduce it so that you get more of these lucrative credits.  Often these credits are simply calculated automatically by the government and sent directly to you—no additional math for you to do. But that’s tricky for some people – you don’t actually see reference to the credits or their calculations on the return; although your tax software will usually provide those references for you.

Net income is also the figure used to determine any clawback of Old Age Security or Employment Insurance Benefits. You want to keep as much of those benefits as possible; so if your income is above the thresholds the Finance Department sets out for benefit eligibility,  the RRSP can reduce income levels to your advantage.

That’s why the RRSP can be your financial hero: it reduces your net income so you get more tax benefits at tax time and all year long.  Remember, the higher your income, the more valuable the deduction of your RRSP contributions will be. The RRSP is a very effective tool in reducing taxable income—so do contribute before midnight March 1!

Check it out with your tax services specialist, or see for yourself by using Knowledge Bureau’s Income Tax Estimator.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 53 books on family tax preparation and planning.

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