Tax Tips for Expecting Mothers in Canada
My wife and I are expecting our first child in the near future. As such I've invested some time in planning our finances over the next year, as my wife will be off of work on maternity leave, slightly reducing our family income. Although it is a busy and exciting time, I strongly suggest planning ahead when faced with upcoming live events.
One of our planned changes, is something I'm struggling to find many posts on, and as such, I've decided to write a quick post for any other future parents who may be slightly less financially creative. I've previously outlined how an RRSP can be used to purchase a first home with little to nothing down ( https://steemit.com/realestate/@dahlsom/canada-s-zero-down-mortgage-loophole ). I will now outline how an RRSP can also be used to defer taxes from the year when you are working to the year you take off.
This is an easy and straight forward strategy to implement. You simply put away as much as you can into your RRSP during the year prior to the year you give birth (if you are giving birth late in the year, you can do this in the year you are giving birth). And then taking the money out in the year you are on maternity leave. If cash is tight, you can do this via a line of credit (make sure to pay it back as soon as you take the money out).
What are the benefits of this approach:
typically a woman earning over $51,300 a year, will have the option of taking off a year at 55% income (capped at $543); or take the new option of taking off a year and a half at 33% income (not sure the cap). Assuming you earn $55,300 annually, you will be moving into a much lower tax bracket after going off on maternity leave as you will be earning $28,215.
At a salary of $51,300, if you live in Ontario, you would expect to pay approximately $9,880 in taxes. At a salary of $28,215, if you live in Ontario, you would expect to pay approximately $3,400 in taxes. If you were to contribute $10,000 into your RRSP in the year you were earning your full salary, and took it out during your maternity leave, your total taxes would be reduced from $13,280 over two years ($9,880 + $3,400 = $13,280) to $11,421 ($6,021 + $5,400). This increases your after tax earnings by $1,859 (or approx. 6.5% of your income during maternity leave).
In addition to reducing your taxes, and increasing your net pay, this strategy also smooths out your income. That is it reduces your income in the year you earn more and increases it in the year you earn less. Or if done via credit it doesn't impact your income in the good years, but still increases your income in the bad years.
Note:
The more you earn the better this works as you will be in a higher income bracket
If you have RRSP contribution room you can offset a lot more taxes
If you have savings in your RRSP you can used the existing savings
I hope to update everyone once I've had a chance to try this out myself.
Dahlsom