Contributing to an RRSP may be horrific advice for low income Canadians.
I was invited to discuss this on TVO’s The Agenda with Steve Paikin this past Friday night. The other panelist was Liz Mulholland, the CEO of Prosper Canada. You can watch the show here.
What’s the deal?
For low income seniors, they may be entitled to what’s known as the GIS (Guaranteed Income Supplement). This is an “income-tested” benefit, and every dollar of income can clawback the benefit received at a rate of 50 cents per dollar of income (and sometimes the effective clawback can be much higher). This would feel like adding another 50% income tax to whatever tax you would pay on an RRSP/RRIF withdrawal (which is itself treated as taxable income).
So it’s possible to make an RRSP contribution, get no refund, and then lose more than 50% of withdrawals down the road for low-income Canadians.
Further, one has to take into account the impact of delaying or advancing any CPP benefits differently. Since CPP is income, taking it early will also reduce any GIS clawback. Conversely, taking it later would increase the clawback.
Saving into a TFSA should be the default option for lower income earners in most cases.
Help spread the word
There is some sophisticated planning required to help low-income Canadians due to the volume of programs, exceptions, and interactions between these programs.
Luckily, John Stapleton has put together a guide that can help people understand this upside-down world. You can download that guide here. You can also visit his website to learn more. While written with Ontario case studies, the framework is applicable nation-wide.
Thank you, John.