How recent tax changes affect RRSPs
Your guide to making a contribution before the deadline creeps up
When we hear the words “tax changes,” our first thought is, How will this impact my bottom line? And with the RRSP deadline just around the corner, chances are you’re wondering how this year’s tax changes might affect your potential savings.
While there have been quite a few talked-about tax modifications this year, in most cases the impact to your bottom line won’t be too weighty.
“I don’t think there will be a huge impact,” says Paul Shelestowsky, CFP, a senior wealth adviser with Meridian. With a little planning it shouldn’t negatively impact your ability to save and, in many cases, you may be able to sock away a few more bucks.
Families with children under18 will see the biggest changes to their taxes. The federal government is ending four child tax credits: arts, fitness, education and textbooks. This means a there will be an added pinch on parents looking to further their children’s extracurricular activities. The tax credit eliminations will be phased out over the next year, with the maximum eligible amount of fitness deduction per child being reduced from $1,000 to $500 for the 2016 tax year. The arts tax credit will drop from $500 to $250. Effective the 2017 tax year, both credits will be eliminated.
So what does that really mean in terms of your bottom line?
“It sounds more significant than it is,” says Jennifer Black, a private wealth manager at DFS Private Wealth. “My worry is some parents may not enrol their children in afterschool activities because they feel they can no longer afford it without the tax break.” The actual impact in dollar value is $280 per child if you claim the full amount for both fitness and tax credits. This, of course, becomes more significant if you have more than one child.
The government has also done away with the universal child care benefit. Again, this may sound worse than it actually is. It has been replaced with a new Canada child benefit (CCB), which is a tax-free monthly payment (universal child care was not tax-free). The amount fluctuates depending on your household income, and is made only to eligible families. As a general rule, families earning less than $30,000 a year will benefit the most, while those earning more than $200,000 will see their benefits completely eliminated, which could mean thousands of dollars.
Something else families need to be aware of: The Liberal government is also cancelling income splitting for families, a tax-reduction measure that allowed one parent to transfer up to $50,000 of his or her income to a spouse with a lower income if they had a child under 18 years of age. A family could lose up to $2,000 when they file their 2016 personal tax returns.
The employment insurance rate change tops the list of tax alterations that will also impact those without children. It has dropped from 1.88 per cent to 1.63 per cent. While this isn’t as significant as promised, it could mean an added savings of up to $118.85 annually for those making $51,300 or more.
Ontarians will get an 8-per-cent rebate on rising hydro bill prices, as the government has decided to nix the provincial portion of the HST. However, the rising costs may eat up most of this money.
Starting in 2016, the feds have changed the income tax brackets, dropping the middle class income tax from 22 per cent to 20.5 per cent. That means if your taxable income is between $45,282 and $90,563, you’ll pay less tax. However, those earning more than $200,000 a year can expect to pay more income tax with the introduction of a new 33-per-cent tax bracket.
Now it’s time to do the math. If you are in a middle- to upper-class household, you stand to lose as a result of the tax changes. Try to adjust somewhere else and not take the money out of your RRSP contributions. If you end up ahead, add the money to your savings — even if it’s only $100 or $200.
“Every little bit counts,” Shelestowsky says.
“Add up all of your tax savings, then add them onto your yearly RRSP contributions.” If you make the adjustment right away, you won’t even notice the money difference, and you’ll help fatten up your nest egg when it’s time to retire.