Family Tax Cut Changes Conventional Wisdom for RRSP Contributions

Before the Family Tax Cut provisions it was straightforward, a given RRSP contribution was always more beneficial if claimed by the higher-income spouse.

However, the Family Tax Cut saves taxes by moving income from a higher tax bracket to a lower.  If the higher-income spouse makes an RRSP contribution, the amount of income that can be moved from the higher tax bracket to the lower is decreased so the Family Tax Cut is decreased.  On the other hand, if the lower-income spouse claims an RRSP contribution, the amount of income that can be moved from the higher tax bracket to the lower is increased so the Family Tax Cut is increased.  This means that, in some cases, the family’s tax bill will be decreased by more if the RRSP is claimed by the lower-income spouse.  Consider the following example.

Example: Optimizing RRSP Claims

Shawn and Brenda live in Vancouver and have two young children.  Shawn’s income from employment is $62,000 and Brenda’s net income from her small business is $27,000.  Brenda reports the UCCB.  The couple has $5,000 to invest in an RRSP for 2014.

Conventional wisdom says that Shawn has the higher net income so the family would benefit more from him making the RRSP contribution.  His savings should be $5,000 x (22%+7.7%) = $1,495.  However, note the results in the table below:

Results from $5,000 RRSP Contribution

Because of the changes in the Family Tax Cut, the family saves more if Brenda (the lower-income spouse) makes the RRSP contribution.  As well savings are less than expected.