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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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