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An RRSP contribution can increase a client's benefits and credits entitlement.wildpixel/iStockPhoto / Getty Images

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When Canadians think about the near-term advantages of contributing to their registered retirement savings plan (RRSP), they likely focus on the potential for a tax refund. But there’s another important way an RRSP contribution can give them additional cash flow: by reducing their net family income to a level that preserves income-tested benefits and credits.

“We can’t do anything about inflation. We can’t do anything about interest rates. But we actually can do something about the amount of taxes we pay and we can increase refundable tax credits proactively with an RRSP contribution,” says tax expert Evelyn Jacks, president of Knowledge Bureau Inc. in Winnipeg.

In 2024, this type of planning may be especially important for families with young children, Ms. Jacks says. As $10-a-day child care rolls out across the country, lower child care expenses may result in higher net family income that reduces the Canada Child Benefit (CCB). She says there’s an opportunity to take child care savings and put them into an RRSP to keep a family’s CCB at its current level.

Other federal benefits and credits that an RRSP contribution may help protect include the goods and services tax/harmonized sales tax credit, age amount, Canada Workers Benefit and the new Canadian Dental Care Plan (CDCP). Provinces and territories have income-tested benefits and credits as well.

Mitchell Shields, wealth advisor, senior financial planner and insurance advisor with Langford Wealth Counsel at Canaccord Genuity Wealth Management in Oakville, Ont., says these programs mean RRSPs can have significant value for people who are often steered away from them.

He suggests taking a second look before dismissing RRSPs for young adults and newcomers to Canada and, as a matter of routine, keeping in mind the trigger points for different benefits and credits.

“Whether you’re at a bank branch or a family office, being aware of what income-tested benefits are available to your clients is arguably your duty,” Mr. Shields says.

That awareness can make a big difference. With the CDCP, for example, a family with an adjusted family net income of $90,000 or more won’t qualify. But if two spouses earning just less than $50,000 each contribute $5,000 each to an RRSP, they could qualify, and “that could be a very material life change for that family,” he says

Build assets, lose eligibility for entitlements?

At the same time, advisors should be mindful of asset-tested benefits – for example, those related to community housing and disability support – because building savings in an RRSP could jeopardize eligibility for these programs. Also, they should assess whether a client can afford to leave savings inside an RRSP over the long term and whether the projected growth of RRSP savings will interfere with income-tested benefits in retirement, including Old Age Security and the Guaranteed Income Supplement.

“Tax planning can’t happen on a one-year basis. We have to look at the long term,” Mr. Shields says. “Of all of the financial planning wins or triumphs – saving taxes or complex strategies – the memories I hold the most are the ones in which I worked with low-income families and worked through their cash flow and left them feeling more empowered.”

The challenge with planning around income-tested benefits and credits is many federal and provincial/territorial programs have different requirements related to family composition and income thresholds, says Calvin Greefhorst, vice-president and regional director of high-net-worth wealth planning with BMO Private Wealth in Vancouver. It can get “quite labour-intensive,” he acknowledges, but it can be an important layer of planning when it comes to determining optimal RRSP contributions.

“First and foremost, we want to make sure the retirement plan makes sense and we’re using RRSP contributions to maximize the tax benefit,” he says, “But anything that we can do to improve our clients’ financial picture a little bit more through government benefits, we’re going to help them do that.”

In practical terms, Mr. Greefhorst looks at clients’ income for the year to determine for which programs they may be eligible. Drawing their attention to a particular threshold that they’re missing by a small margin can be a strong incentive to top up this year’s RRSP contribution. Meanwhile, educating clients about these programs helps to demonstrate the breadth of an advisor’s expertise.

However, he stresses advisors need to weigh the pros and cons of shaping a strategy specifically to protect income-tested benefits and credits carefully.

“We don’t want to get too focused on just these income-tested benefits. We want to make sure we’re looking at the whole picture. We like to do holistic planning, so we want to make sure we’re factoring in the tax planning, the estate planning, all of these pieces before we make any recommendations on what a client should do,” Mr. Greefhorst says.

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