How to use RRSP contributions to maximize the Canada Child Benefit (CCB) and other government benefits

What benefits can I increase by making RRSP contributions?

RRSP deductions are a beautiful thing. First there’s the normal reasons: You get a tax refund for the amount at your highest marginal tax rate, and when you withdraw the amount later in life you’ll likely be in a lower tax bracket, so you save tax overall. But they’re not that simple. These additional points make RRSPs an important weapon in your financial planning arsenal:

  1. RRSP deductions lower your net income for the year, potentially boosting the amount of means-tested government benefits you may be eligible for.
  2. If you don’t use all of your RRSP contribution room, you can carry it forward to the next year.
  3. If you want to go ahead and make an RRSP contribution, you don’t have to claim the deduction in the same year you made the contribution. You can get the benefit of being invested in the market longer, while strategically planning when to take your deduction to maximize your means-tested benefits.

To get the most benefits out of your RRSP contributions, you’re going to have to make use of those points, but first, what benefits are we talking about here?

Federally, the Canada Child Benefit (CCB) is the largest and most common benefit people try to maximize, but there’s also the GST/HST credit, and the Canada Workers Benefit (CWB; this replaced the Working Income Tax Benefit in 2019). Provincially, all provinces and territories except Manitoba, Saskatchewan, and PEI offer an additional provincial child benefit, and some have income supplements for low income families.

There is an RRSP deduction sweet spot

While RRSPs reduce your net income and therefore increase your eligibility for means-tested government benefits, the relationship is not linear, and requires some planning to come out on top. Here’s a graph I made to show how this plays out:

The graph above takes into account 5 government benefits (CCB, GST/HST, CWB, a provincial child benefit, and a provincial income supplement). See how there’s a very steep decline in the benefit amount up to about $65,000 in net family income, and a more gradual decline after that? This means you’re going to get more bang for your RRSP buck if you can bring your income under $65k. Let’s zoom in at that sub-65k sweet spot:

Ok, now let’s look at some hard numbers to let this really sink in, shall we? I’ll use an Ontario couple for the example, since it is the province with the highest population in Canada. Both families below have 3 children (1 under 6, and two between 6 and 17), and both will make a $5000 RRSP contribution and deduction. The taxes are estimated and only include standard deductions for simplicity. Note: the graph above is not for Ontario, so the numbers will be a little different.

Table 1: ROI of a $5k RRSP contribution + deduction in families below and above the $65k net income threshold (additional benefits only)

Family #1 Family #2
Income 60,000 60,000 85,000 85,000
RRSP Contribution 5,000 5,000
Adjusted Income 60,000 55,000 85,000 80,000
Benefits for 3 kids 14,430 16,212 9,849 10,249
Extra benefits received 1,782 400
ROI on RRSP Contribution 36% 8%

The sub-65k family is seeing 4.5x the ROI of the 65k+ family! But this is just the ROI on your RRSP deduction based on the extra benefits you receive. What happens when we take the tax refund you’d get back into consideration?

Table 2: ROI of a $5k RRSP contribution + deduction in families below and above the $65k net income threshold (including tax refund)

Family #1 Family #2
Income 60,000 60,000 85,000 85,000
RRSP Contribution 5,000 5,000
Adjusted Income 60,000 55,000 85,000 80,000
Benefits for 3 kids 14,430 16,212 9,849 10,249
Extra benefits received 1,782 400
Taxes 10,757 9,275 18,283 16,709
Tax refund 1,482 1,574
OVERALL SAVINGS 3,264 1,974
ROI on RRSP Contribution 65% 39%

Holy sweet jumping jelly beans, if you’re in that sub-65k sweet spot you get an extra 26% on top of your ROI, bringing it to a whopping 65%! That’s insane! And the sub-65k family still pulls ahead at 1.7x the ROI of the 65k+ family.

But is this truly real? After all, we eventually have to pay taxes on that $5000 contribution when we start to withdraw. Let’s take that into consideration as well. A general rule of thumb in retirement planning is that you’ll need 70-80% of your post-retirement income. Let’s assume these folks are in the FIRE movement, and aren’t going to have CPP or OAS to draw on for some time, so RRSPs are where it’s at. Also let’s go with the top of the range, in case they like splurging on expensive ice creams at the Farmer’s Market every now and then.

Table 3: ROI of a $5k RRSP contribution + deduction in a family below and above the $65k net income threshold (including tax refund and post-retirement taxes)

Family #1 Family #2
Income 60,000 60,000 85,000 85,000
RRSP Contribution 5,000 5,000
Adjusted Income 60,000 55,000 85,000 80,000
Benefits for 3 kids 14,430 16,212 9,849 10,249
Extra benefits received 1,782 400
Taxes 10,757 9,275 18,283 16,709
Tax refund at contribution time 1,482 1,574
80% Post-retirement income 48,000 68,000
Marginal tax rate on $5k withdrawal 24.15% 29.65%
Taxes on $5k withdrawal at retirement (1,208) (1,483)
OVERALL SAVINGS 2,057 492
ROI on RRSP Contribution 41% 10%

So even taking into account the taxes you’ll eventually have to pay on your RRSP contribution, being in that sub-65k sweet spot gives a 4.1x greater ROI on your investment.

But what can affluent families do to maximize government benefits?

Ok, all well and good you say, but what about more affluent families? What if getting below $65k/year seems like a laughable exercise to you? Have no fear, my friend. All you need is a little tax planning.

For this example we’re also using an Ontario couple with children the same age as those above (1 under 6 years old, and two ages 6-17), but this couple earns $100k/yr. When they make RRSP contributions, they’re going to contribute the maximum amount (18%). But first, let’s look at the “base calculation”, with no RRSP contributions. Again, tax amounts only include standard deductions for simplicity.

Table 4: Base calculations of taxes and benefits for a family earning $100k/year

Year 1 Year 2 Year 3 3-yr total
Income 100,000 100,000 100,000 300,000
Benefits for 3 kids 8,649 8,649 8,649 25,946
Taxes while working 23,708 23,708 23,708 71,124
NET TAX 15,059 15,059 15,059 45,178

Now, let’s look at a family who doesn’t do any tax planning, and contributes the max they can to their RRSP each year (18%), and claims the deduction that same year. We’ll compare their numbers to the base numbers above to see their increased ROI.

Table 5: ROI of yearly max RRSP contributions + deductions in a family earning $100k/yr

Year 1 Year 2 Year 3 3-yr total
Income 100,000 100,000 100,000 300,000
RRSP Contribution 18,000 18,000 18,000 54,000
Adjusted Income 82,000 82,000 82,000 246,000
Benefits for 3 kids 10,089 10,089 10,089 30,266
Extra benefits received 1,440 1,440 1,440 4,320
Taxes while working 17,338 17,338 17,338 52,014
Tax refund at contribution time 6,370 6,370 6,370 19,110
80% Post-retirement income 80,000 80,000 80,000 240,000
Marginal tax rate on RRSP withdrawal 31.48%
Taxes on RRSP withdrawal at retirement (5,666) (5,666) (5,666) (16,999)
OVERALL SAVINGS 2,144 2,144 2,144 6,431
ROI on RRSP Contribution 12%

A 12% ROI isn’t bad at all! But with a little tax planning we can bump that up significantly. So instead of contributing the max every year, we’re going to use the ability to carry forward our unused contribution room to the following year, and then make one massive contribution in year 3.

Table 6: ROI of delaying RRSP contributions in a family earning $100k/yr, then making a lump sum contribution

Year 1 Year 2 Year 3 3-yr total
Income 100,000 100,000 100,000 300,000
RRSP Contribution 54,000 54,000
Adjusted Income 100,000 100,000 46,000 246,000
Benefits for 3 kids 8,649 8,649 19,452 36,749
Extra benefits received 10,803 10,803
Taxes while working 23,708 23,708 6,745 54,161
Tax refund at contribution time 16,963 16,963
80% Post-retirement income 80,000 80,000 80,000 240,000
Marginal tax rate on RRSP withdrawal 31.48%
Taxes on RRSP withdrawal at retirement (16,999) (16,999)
OVERALL SAVINGS 10,767 10,767
ROI on RRSP Contribution 20%

And just like that, we’re up an additional 8%! But what about the opportunity cost of not investing right away? Well, rather than waiting for the contribution room to build up, you could just as easily put 18% into your RRSP each year, and carry forward the deduction amount until year 3.

Running your own numbers

You can follow the same logic I laid out above to run numbers relevant to your own province and financial sceneario. I estimated taxes using EY Canada, and benefits using the Government of Canada’s CCB Calculator. Have fun!

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