Convention alwisdom tells us that Registered Retirement Savings Plans (RRSPs) are not very beneficial for lower income individuals or families, since they pay little (or no) taxes as it is and since tax deferral is one of the main benefits of RRSP’s. Is this really true, though? Should lower income Canadians be making RRSP contributions?

1. A deciding factor can be children because of the government benefits involved, namely the Child Tax Benefit (CTB). For most middle income Canadian parents, the CTB amounts to 2% per child under 18, so for every dollar of extra income they earn, they lose 2% of their CTB. Conversely,RRSP contributions will generate an extra 2% in CTB per child.

For families with taxable incomes below about $36,000, though, every dollar of income makes a difference of roughly 12% in their CTB! Note that is per child, a second child in this example would mean a nearly 24% CTB generated by every dollar of RRSP contribution.

CTB is also tax free money with no strings attached, not just a deferral of taxes like an RRSP is. Note that these numbers only work down to certain income levels. Use the calculator here to play with your own numbers and see the impact.

2. Another factor is the GST credit. If you are in the income range where you still qualify for it (around $41k family income with no kids, higher qualifying limit if you do have children), an RRSP contribution will generate an additional 5% on your GST rebate cheques.

More Benefits for Ontario Residents!

Ontario residents get two additional benefits as well. Firstly, the rent/property tax credit (also only for lower income Ontarians) also generates a 2% benefit for every dollar you lower your taxable income. Secondly, the way Ontario tax reduction works with children, your taxes will be reduced for every child you have.

So for a family with two kids living in Ontario, earning a family income of $36,000, their effective marginal tax rate is just over 70%! Every dollar of RRSP contribution will generate $.70 in lowered taxes and increased government benefits.

The Bottom Line

It’s worthwhile to play with a CTB and GST calculator to look at potential scenarios for your own situation. Even if you aren’t in a low enough bracket to qualify for the above programs, but you are close, you could consider something like a one time RRSP loan to drag your income down just for one year (TD’s eFunds is a great place to open up an RRSP). In certain situations, the benefits generated by doing so could easily pay for the loan costs and much of the RRSP contribution itself!