Tax Literacy Tip: Meet March 1 RRSP Deadline – Increase Cash Flow

Same neighborhood, similar income, less cash flow?  The secret in the financial sauce could well be an RRSP strategy.  With the deadline only weeks away (March 1, 2023), it’s time to buck trends to forego the RRSP contribution and consult with your financial advisor now to exponentially increase both income and wealth.

Buck the Trends. A year ago an Edward Jones[1] study found over 50% of respondents would not contribute to an RRSP – over half because they couldn’t afford to.  Others were prioritizing TFSAs, non-registered investments and real estate over the RRSP.  But can you afford to miss the RRSP?  If your household qualifies for non-refundable or refundable tax credits, the answer is likely no.

Help Yourself to the Top Three Benefit.  There are three tax savvy reasons to maximize your RRSP:

1. Reduce taxes payable.  According to the Canada Revenue Agency (CRA) the average tax refund last year was $2092.  That’s the first reason to make an RRSP contribution - get a bigger tax refund – because your investment results in a deduction which reduces taxes payable. That deduction is worth more as your income rises. A disciplined investor will take that tax refund and contribute it to another tax-advantaged account: a Tax Free Savings Account (TFSA) or the new FHSA (First Home Savings Account), which becomes available April 1.

It’s also important for students with part-time income to make an RRSP contribution. By reducing income below the basic personal amount, it’s possible to transfer tuition tax credits to supporting individuals who are footing the bill.   But filing a tax return to report prior year earnings – even babysitting, lawn care, and barista earnings – will help to build the unused RRSP room.

2. Reduce net income.  If net family income is in or near a benefits “clawback” zone, an RRSP will help you get more Canada Child Benefits (CCB), Canada Worker’s Benefits (CWB), GST/HST Credits, the Canada Dental Benefit (CDB) and in some cases provincial credits, too.  Seniors under the age of 72 may be able to avoid an Old Age Security (OAS) reduction.  Further, high earners receiving Employment Insurance (EI) could avoid repaying up to 30% of their benefits by reducing their net income below the repayment threshold.  The clawback zones appear below for the 2023 benefit year.

   Tax Benefit	Maximum Benefit	Reduced When Net Income is above
   Canada Child Benefit	$7437 ($619.75/month)	$34,864
   Canada Worker’s Benefit	$1428 Singles $2461 Family	$23,495 $26,805
   GST/HST Credit	$325 Adult $171 Child or Single supplement	$42,335
   Canada Dental Benefit	$650 per child	$70,000
   EI Benefits	Up to 55% of earnings max $650 a week	$76,875
   Old Age Security – maximum monthly amount first quarter 2023	$687.56 age 65 but under 75 $756.32 if 75 or older* $935.08 if deferred to age 70	$86,912

3. Earn tax deferred income.  Future withdrawals of both earnings and principal must be added to income (remember you get a deduction for the contribution so it was invested on a pre-tax basis).  However, the tax deferral along the way does allow faster growth than investments in a non-registered account.  Plus there are a couple of opportunities for tax deferred withdrawals for specific needs:

   1. Lifelong Learning Plan (repay in equal increments within 10 years to avoid paying tax)

   2. Home Buyer Plan (repay in equal increments within 15 years to avoid paying tax)

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