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Dale Jackson

Personal Finance Columnist, Payback Time


Not many of us think about our registered retirement savings plans (RRSPs) in May, but the month normally associated with new life can flower into some decent tax savings.

As the mid-point of the 2018 tax year draws near, your next pay stub should provide an accurate estimate of the sort of financial year you will have – and how much you will need to contribute to get the biggest tax refund.

Estimating your annual taxable income is easier for some Canadians than others. Many company payroll departments simply divide it by the number of pay periods. Others might include commissions and bonuses, which could mean income could vary from year to year.

If your RRSP contribution is too small you could be paying tax in a higher bracket. If it’s too large you might only be saving in a low tax bracket.

Estimating your annual gross income now can give you a jump on targeting the biggest tax savings before the March 2019 contribution deadline.

To find that sweet spot, you need to know the marginal federal and provincial tax rates. The following are rounded-off estimates for a taxpayer living in Ontario but they are pretty consistent across the country.

Taxable income under $40,000 is taxed at about 20 per cent. That means every dollar contributed to an RRSP generates a 20-cent refund. Once you pass the $45,000 threshold, the tax rate jumps to about 30 per cent, making the tax refund 30 cents on every dollar contributed.  

If you’re headed for an annual gross income under $45,000, you might want to hold off contributing until a future year when you earn more and can get a bigger refund.

The marginal tax rate and the refund grows bigger when annual gross income tops $90,000 (37 per cent up to $140,000). The rate rises to about 41 per cent between $140,000 and $200,000, and 46 per cent over $200,000.

Of course, RRSP withdrawals are fully taxed in retirement, but the funds often have decades to grow tax free and if you plan it right, your withdrawals will be taxed in the lowest bracket.

If you make regular RRSP contributions, you might want to boost them to get a bigger refund if you’re in a higher bracket. If your income is too low for a significant refund, you can still contribute but wait to claim it in a higher income year in the future. Remember, available contribution space can be carried forward.