Tax-saving strategies for maximizing your money in your working years

After pension contributions, union dues, and all other deductions, you owe it to yourself to capitalize on every tax-saving strategy possible—regardless of where you are on the pay grid.

Funds contributed to a TFSA are after-tax, unlike an RRSP which involves tax-deferred money. For this reason, the investment income produced within a TFSA accumulates tax-free, making it a smart investment vehicle to save for future goals at any age.

What makes the TFSA a perfect way to save early in your career is the fact that you don’t need to be at the top of the pay grid in order to afford making contributions.

For example, when you divide the $5,500 annual contribution limit into 52 weeks, that equals just under $106 a week—or better yet, $15 a day.

Tip: Consider setting up pre-authorized TFSA contributions that automatically get deducted from your bank account. With the ability to select the contribution amount you’re comfortable with and the frequency (weekly, bi-weekly, monthly), you won’t even miss that $15 a day.

Since you’re paying into a pension plan, putting money into an RRSP probably isn’t a priority. However, instead of viewing it purely as a retirement savings vehicle, think of an RRSP as a powerful tax-planning tool that you can leverage as you start earning more.

This will become especially beneficial as you approach the top end of the pay grid, considering that:

When you contribute to an RRSP, that money is tax-exempt for as long as it’s kept within the plan.
Individuals are taxed on their net income (income after deductions, which includes a deduction for any RRSP contributions). This can result in significant tax savings.

Keep in mind that the benefit you earn through your pension plan is linked to RRSP contribution room.

The greater the value of your pension benefit, the less room you will have to contribute to an RRSP.

However, a spousal RRSP can potentially be another tax-planning tool you leverage when you’re at the top of the pay grid and RRSP contribution room is limited. The one caveat would be if your spouse/partner were also an education member—making this option redundant (since both of you are paying into a defined benefit pension plan).

How a spousal RRSP works:

It would be set up in the name of the lower income-earning spouse.
You don’t have to be married to open a spousal RRSP, it also applies to common law partners.
You can make contributions to and receive tax deductions from a spousal RRSP, keeping in mind to stay within the contribution room for both.

Benefits to a spousal RRSP:

Allows for income balancing for the higher income-earning spouse. Couples with equal income basically receive double the tax deductions.
If you’re a first-time home buyer or looking to fund additional post-secondary education, you can take money out of a spousal RRSP just as you would a regular RRSP. This means withdrawals would incur no penalties as long as the amount is paid back within the required timeframe.
Since retiring with a pension would push you into a higher tax bracket, having the same amount divided between your RRSPs and your spouse’s ‘spousal RRSPs’ upon retirement would put you in a lower tax bracket (which means paying at the same, lower marginal tax rate).

Did you know?
Using your RRSP and your spouse’s ‘spousal RRSP’ for the Home Buyer’s Plan doubles the $25,000 maximum withdrawal. That’s up to $50,000 in combined RRSP funds you can put towards a down payment.

While the contributions you make to RESPs are not tax deductible, the major advantages it provides as a top investment choice for post-secondary savings for your children are:

Earnings accumulate on a tax-deferred basis.
You’ll receive an additional 20% of your RESP investment in the form of the Canada Education Savings Grant (CESG)—which equals up to $500 annually on the first $2,500 per year, up to a lifetime maximum of $7,200 per child.
There’s no annual contribution limit. Just make sure you don’t go over the $50,000 cumulative maximum for each beneficiary, since over-contributions are subject to a special 1% monthly tax.
When it comes time for your child to withdraw RESP funds, the accumulated income earned in the plan (such as dividends or interest and grants like Earning Assistance Payments) is taxed in their hands at a lower tax rate.
A family plan RESP offers the flexibility to share accumulated income and grants among your other children, or to change the beneficiary of the plan to someone else in the family.
Not only parents have the power to set up an RESP—they can also be set up by uncles, aunts, and grandparents, making it the ultimate education savings investment the whole family can get in on.

Tip: Make your RESP contributions by the December 31st deadline each year in order to take advantage of the full 20% CESG amount annually. While you can catch up on previous years’ contributions, the maximum CESG that can be received annually per child when you’re playing ‘catch-up’ on RESP contributions is $1,000.

Eligible educator school-supply tax credit

Claim 15% of up to $1,000 in eligible school supply expenses
Up to a maximum tax credit of $150 a year (keep those receipts!)

Ontario Trillium Benefit

It comprises of the following:

Ontario Sales Tax Credit. Ontario residents can receive up to $301 for the year.
Northern Ontario Energy Credit. Northern Ontario residents (Algoma, Cochrane, Kenora, Manitoulin, Nipissing, Parry Sound, Rainy River, Sudbury, Thunder Bay, Timiskaming) can receive a tax-free payment of up to $151 for single residents or $232 for families, to help pay for higher energy costs.
Ontario Energy and Property Tax Credit. You could get a maximum of $1,043 in the form of a tax-free payment to assist with your property taxes and sales tax on energy costs (for ages 18 to 64).

Canada Child Benefit (CCB)

Tax-free monthly payment made to eligible families/single parents to assist with the cost of raising children under the age of 18
Benefits are paid over a 12-month period (July to June)

Child-care expense deduction

You can claim this if you hire caregivers or enrol your children in day/overnight camps, nursery schools/centres, educational institutions that provide childcare services, and boarding schools.
The amount you can deduct annually is $8,000 for each child under the age of 6, and $5,000 for each child between 7 and 16.

Child Disability Benefit (CDB)

This benefit is for families who care for a child under the age of 18 who has a severe or prolonged impairment in physical or mental function.

Did you know?
Only 7% of Canadians planned on taking advantage of child-care-related tax credits and deductions (according to a survey conducted by tax filing software TurboTax)—meaning 93% of parents could be missing out on thousands of dollars in tax credits.

In summary, you can maximize your income by leveraging the following tax-saving strategies:

Maximize investment income by holding it in a TFSA
Open a spousal RRSP to reduce household income in retirement
Claim all eligible credits at tax time, including the Eligible Educator School-Supply Tax Credit

Whether you’re ready to set up a TFSA, RRSP, and/or RESP—or simply want to know how to make your hard-earned money work even harder, we’d be happy to discuss your options with you. For over 40 years we’ve been providing financial advice exclusively to education members, which means we have a unique understanding of everything from pay grids to pension plans. It’s the kind of insight that puts us in the perfect position to help you maximize every dollar so you can achieve your financial goals.

For more information on the list of tax credits and benefits mentioned above, be sure to visit the CRA website.

The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy.

Your Guide to Lifelong Earning for Educators

Let’s talk about making your money work harder. If you’re looking for a way to truly maximize your after-tax earnings, have an Educators financial specialist contact you.