Tax Literacy Matters

It’s financial literacy month and that includes tax literacy.  High income earners, for example, will be interested to know that the RRSP maximum dollar limit - $30,780 – was recently announced for 2023. 

Those with earnings at top tax brackets can save over 50% in taxes for each dollar invested.   But the RRSP can be even more lucrative for lower earners, whose income-tested benefits are reduced by unusual income sources, like CERB, CRB or a severance retroactive payment.   Tax literacy would help in these situations:  

• Last year a Nova Scotia family lost $323 a month in Canada Child Benefits because they received CERB, as reported by the CBC .  Making an RRSP contribution with at least some of the CERB money could have preserved some or all of these benefits.
• Pandemic support benefits can also affect eligibility for the Guaranteed Income Supplement (GIS).  Age-eligible seniors with RRSP contribution room, or those 72 and up with younger spouses, could preserve GIS by reducing net income by contributing to an RRSP.
• Seniors paying per diem rates at nursing homes or other residences will have to pay more rent with unusual income receipts, because income testing is used to qualify for lower rates. Again, an RRSP can help.
• Pharmacare deductibles may also have risen because net income rose in the year, which means the cost of drugs could be higher for some.

In each of these scenarios Canadians were caught unaware of the tax rules behind their government benefits.  In fact,  CRA did not make it clear at all on their pandemic support pages that recipients of pandemic support income would suffer these consequences down the line.  

For some, a remedy may be to repay the benefits before year end, claim a deduction for the repayment,  and then restore eligibility for income supports or lower cost rent or drugs. 

Bottom Line:  Tax literacy matters.  Tax and financial advisors play an important role on the frontlines of the financial health of low income Canadians and eliminate unanticipated financial surprises like these down the line.  Be sure to be proactive to help families and age-eligible seniors by reviewing opportunities to retain benefits and reduce costs due to income-testing prior to year-end.