How to increase your Child Tax Benefit with an RRSP Contribution
RRSPs can be valuable deductions at tax time. The 2017 tax deduction deadline is March 1, 2018. The Canada Child Tax Benefit is recalculated every July based on your Adjusted Family Net Income (AFNI) from the previous taxation year. AFNI is your net income found on line 236 of your income tax return plus the net income of your spouse or common-law partner, if you have one.
Tax calculations in Canada primarily consist of income, deductions and tax credits. Deductions available to young families include child care expenses and RRSP contributions both of which will lower your AFNI. An RRSP contribution will effectively reduce taxable income and increase the Child Tax Benefit.
Consider a family with three children under the age of six with a gross income of $85,000.00 and child care costs of $15,000.00 annually. The AFNI calculation is $70,000.00 ($85,000.00- $15,000.00).
| Step 1 Family with 3 children under the age of 6 | Months | 2017 Basic Benefit | Total Basic Benefit |
| Number of children and months children are under 6 | 36 | X $6,400.00/12 | $ 19,200.00 |
| Number of children and months children are 6-17 | 0 | X $5,400.00/12 | $ - |
| Total Basic Benefit (Step 1) | | | $ 19,200.00 |
| Step 2 Benefit reduction | ||||
| Adjusted Family Net Incom (AFNI) | No RRSP contribution | $5,000.00 RRSP contribution | ||
| $ 70,000.00 | $ 65,000.00 | |||
| First reduction for the portion of income between $30,000 and $65,000.00. | | |||
| Family with one child (maximum $35,000) | $ - | 7.00% | $ - | $ - |
| Family with two children (maximum $35,000) | $ - | 13.50% | $ - | $ - |
| Family with three children (maximum $35,000) | $ 35,000.00 | 19.00% | $ 6,650.00 | $ 6,650.00 |
| Family with four (or more) children (maximum $35,000) | $ - | 23.00% | $ - | |
| Second reduction for the portion of income over $65,000 | | | ||
| Family with one child (AFNI - $65,000.00) | $ - | 3.20% | $ - | $ - |
| Family with two children (AFNI - $65,000.00) | $ - | 5.70% | $ - | $ - |
| Family with three children (AFNI - $65,000.00) | $ 5,000.00 | 8.00% | $ 400.00 | $ - |
| Family with four (or more) children (AFNI - $65,000.00) | $ - | 9.50% | $ - | $ - |
| Total reduction Amount (Step 2) | | | $ 7,050.00 | $ 6,650.00 |
| Step 3 Net Basic Benefit | Net Benefit No RRSP contribution | Net Benefit$5,000.00 RRSP contribution | |
| Step 1 | $ 19,200.00 | $ 19,200.00 | |
| Step 2 | $ 7,050.00 | $ 6,650.00 | |
| Total Net Basic Benefit | $ 12,150.00 | $ 12,550.00 | |
| Total Net Basic Monthly Benefit | $ 1,012.50 | $ 1,045.83 |
This family would also be entitled to the Ontario Child Benefit. It is combined with the Canada Child Benefit into a single monthly payment.
| Step 1 Ontario Child Benefit (OCB) | Months | 2017 Basic Benefit | Total Basic Benefit |
| Number of children and months under 18 | 36 | X $1,397.00/12 | $ 4,191.00 |
| Step 2 Benefit reduction | ||
| Adjusted Family Net Income (AFNI) | No RRSP contribution | $5,000.00 RRSP contribution |
| $ 70,000.00 | $ 65,000.00 | |
| Subtract 2017 base amount | $ 21,037.00 | $ 21,037.00 |
| AFNI over base amount | $ 48,963.00 | $ 45,963.00 |
| Reduction rate | 8% | 8% |
| Total reduction amount | $ 3,917.04 | $ 3,677.04 |
| Step 3 Net Basic Benefit | Net Benefit No RRSP | Net Benefit $5,000.00 RRSP |
| Step 1 | $4,191.00 | $4,191.00 |
| Step 2 | $3,917.04 | $3,677.04 |
| Total Net Basic Benefit | $273.96 | $513.96 |
| Total Net Basic Monthly Benefit | $22.83 | $42.83 |
That is a combined savings of $800.00 on top of the deduction that they would receive for making the RRSP contribution. Depositing the additional $800.00 Child Benefit to a Registered Education Savings Plan RESP would also be eligible for 20% in Canada Education Savings Grant (CESG) from the Federal government. Read more about RESPs in my last article here.
Click here to calculate your own Child Tax Benefit or use the blank worksheets here. The Fall Economic Statement provided proposed increase in the benefit to keep pace with inflation and raising cost of living for July 2018. You can find the new figures here.
Lindsay Fothergill B.A., CFP graduated from the University of Guelph with honours in 2006 and began working at Brittain Group Financial Services the same year. Lindsay pursued financial planning as a career and in 2012 and became a Certified Financial Planner. Read more about our team here.
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