January 06, 2016

Special RRSP Tax Considerations for 2015

For our Canadian readers, after the joy of the holidays comes the joy of …RRSP season!!!

Many may think I’m wacky but I kind of like RRSP season as it often rhymes with investing money and reducing taxes. It’s always a delight for me to torture my brain and find the best way to save as much as possible on taxes.   

My passion for RRSP reasoning will be well served this year as matters are even more complicated due the transition between the conservative and liberal governments.

Doing a thorough analysis would still be a nightmare so let’s limit ourselves to my family’s situation to help grasp some of the implications. I hope it will inspire you to explore your own RRSP tax conditions afterwards and complete all relevant research.

Before we go into the thick of things, I’ll remind you that I am not an investment or tax professional of any kind. The intent of this blog is not to give specific tax-related or investing advice. Before investing yourself, we suggest you to do all necessary research and consult a licensed financial professional if need be.
One Major Change

Because of the unusual transition situation, should we increase or reduce RRSP contributions this year? That is the question!

Starting in 2016, the liberals will reduce the middle tax bracket from 22% to 20.5% (for taxable income between $45,282 and $90,563 in 2016). They will also introduce a new tax bracket of 33% for taxable income over $200,000 but this measure won’t affect us with our more modest revenue. 

This year, my taxable income is already under the 22% tax bracket (for taxable income between $44,701 and $89,401 in 2015) as my salary is reduced to Pay for my Upcoming Leave of Absence. My situation should be similar in 2016 and 2017.

So, that settles it…looks like no RRSP contribution change will improve my situation.

Whoa! Not so fast…

Last Chance for Family Income Splitting

Oops! I was forgetting to consider the other half of our couple…the better half some might say!

Indeed, again in 2016, new liberal policies will put an end to the Family Tax Cut (better known as Family Income Splitting) and include it in their new Canada Child Benefit program (CCB).

Thus, 2015 will be the last year all of us can take advantage of that conservative tax measure.

As some of you might already know, my wife makes the biggest salary in our household. A friend recently found a great way to get rich quick as he married a rich woman. Last week, he taped me on the back and said that I was not that far behind as I married a woman making a lot more than me. 

Joking aside, in our case, transferring some of her income to me would result in a juicy Family Tax Cut credit in 2015. Taking that measure into account and making my RRSP contributions in 2015 instead of 2016 will result in a refund 5% to 8% higher (considering provincial taxes).  

It’s also the other way around for my wife’s RRSP; she will get a bigger refund if she contributes in 2016. The difference is smaller (about 3%) but still worth the wait.   

Additional Measures that Affect our Family

The creation of the liberal Canada Child Benefit (CCB) will also affect our family’s situation. The unique CCB will replace several child related measures. The new CCB will be non-taxable but income tested.

Here’s a great Globe and Mail video that resumes how the new CCB will affect your family:

For our family, more RRSP contributions in 2015 as opposed to 2016 will result in higher CCB payments in 2015 but corresponding lower benefits in 2016. The net effect is null but we will get some of that money faster.

In addition, the liberals have decided to roll back TFSA contributions in 2016 to $5,500 from $10,000.

This measure affects our family a bit but is not that bad. We will still be able to contribute at least $11,000 (2 times $5,500) of new money to our TFSA each year.   

Analyze the Combined Effect

After analysing all those special considerations for this year, we have decided to maximize my RRSP contributions in 2015 and will contribute about $15K more. My 2016 contributions as well as my wife’s will be decreased to compensate. 

With retrospect, the reduction of the middle tax bracket is a great thing for us. In upcoming years, it will unable us to pay a bit less taxes as we withdraw from or unregister my RRSPs. My revenues should remain fairly low as I continue to follow my 12-Year Plan to Escape 9-to-5.

Every family’s tax situation has its subtleties and can be complex. Take some time to analyze your own situation and be sure to consider the combine effect. You income as well as your spouse’s have to be taken into account as you saw from our personal example. Also don’t forget provincial tax considerations.

Don’t worry, you still have plenty of time to consider all the possibilities. You could even buy yourself extra reflection time by contributing between January 1st and February 29th of 2016 (the RRSP deadline for 2015 taxes). That way, the ultimate decision could be delayed until your actually file your 2015 taxes and specify which amount you will deduct in 2015 or 2016.

For specific details, be sure to consult Canada Revenue Agency and provincial government’s publications. We also recommend you to consult tax/investment specialists if need be.

Have a joyful RRSP season!

Please take a moment to tell us or ask questions about your RRSP story for 2015/2016. 

Photo Credit

1 comment:

  1. A quick comment to clarify our situation…

    Our original plan was to contribute 5K$ each to our RRSPs both in 2015 and 2016.

    Last couple years, my wife’s RRSP contributions were maxed out because her salary was bigger and it was much more tax efficient to do so. My unused RRSP contributions room is around 15K$.

    My marginal tax rate in 2015 is around 39% for the first couple thousand dollars invested to my RRSP and declines to about 36% afterwards. In 2016, my marginal tax rate will only be 31%.

    Contributing to my RRSP in 2015 instead of 2016 gives me a relative advantage of 5 to 8%.

    That’s why we will skip my wife’s RRSP contribution this year and invest 20K$ in mine (extra 15K$ versus the usual 5K$).