Personal Finance

Would tuition credit affect RRSP?

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  • Mar 21st, 2017 11:03 am
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Would tuition credit affect RRSP?

Lets say I will be making 75k this year, have 14k for RRSP room, and about ~35k of unused tuition credit left.

Is it better to NOT contribute to RRSP this year and let the tuition credit finish off?

Thanks
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sheepe wrote:
Mar 20th, 2017 11:36 am
Lets say I will be making 75k this year, have 14k for RRSP room, and about ~35k of unused tuition credit left.

Is it better to NOT contribute to RRSP this year and let the tuition credit finish off?

Thanks
Use the RRSP to lower your income to a bracket that makes sense for you. Tuition credits are always worth the lowest bracket so it does not matter when they are used.
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Lets say I will be making 75k this year, have 14k for RRSP room, and about ~35k of unused tuition credit left.

Is it better to NOT contribute to RRSP this year and let the tuition credit finish off?

Thanks
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Kasakato wrote:
Mar 20th, 2017 11:42 am
Use the RRSP to lower your income to a bracket that makes sense for you. Tuition credits are always worth the lowest bracket so it does not matter when they are used.
But would the tuition credit be used based on my 75k? Or based on the lowered tax bracket? Might be noob Q...
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Feb 10, 2015
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I would plug both scenarios into your preferred tax software and see which one comes out more to your advantage.
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RRSP contributions deduct from your gross income before arriving at your net/taxable income.

Tuition and Education amounts are non-refundable tax credits.

Short Answer: Contribute to RRSPs if you would like to. having tuition credits remaining doesn't change that.

Detailed Answer: When you claim RRSP contributions, your total tax liability goes down for that year. If you deduct $14K on a $75K income, your tax liability should go down by $4,151. So instead of your combined federal/provincial taxes being, say, $14,000 for the year (ballpark), they'll be $9,849. Then, your non-refundable tax credits get applied, and you'll probably use up all of those tuition credits, reducing that ~$9,849 liability down to, say, $2,849 (Federal+Provincial tuition credits aren't 1:1, but ballpark $35K of unused tuition amounts is worth $7K). Then, you will get a refund of the difference between the income tax withheld on your paycheques (say $14K) and the $2,849 you actually owe. ~$11K refund.

If you hadn't contributed to (or deducted) the RRSP that year, you'd owe the ~$14K in tax, less the same ~$7K in tuition credits, so if you had ~$14K withheld you'd get a ~$7K refund.

Basically, the one is not affecting the other, they're independent events. If you had a higher unused tuition amount balance, the RRSP contributions could end up effectively stretch your tuition amounts out farther (less desirable, government holding onto your credits for another year), as you can't reduce your tax liability below $0 (Tuition is a Non-Refundable tax credit), but in your case you're likely through the credits this year anyway.
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DanTh3Man wrote:
Mar 20th, 2017 12:10 pm
I would plug both scenarios into your preferred tax software and see which one comes out more to your advantage.
Yeah... Was thinking someone had a clear cut answer to these things lol
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sheepe wrote:
Mar 20th, 2017 12:20 pm
Yeah... Was thinking someone had a clear cut answer to these things lol
Tuition is a tax credit and nothing to do with the rrsp. It doesn't matter what tax bracket you are in, the tuition tax credit will always be the same.
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Mike15 wrote:
Mar 20th, 2017 12:18 pm
RRSP contributions deduct from your gross income before arriving at your net/taxable income.

Tuition and Education amounts are non-refundable tax credits.

Short Answer: Contribute to RRSPs if you would like to. having tuition credits remaining doesn't change that.

Detailed Answer: When you claim RRSP contributions, your total tax liability goes down for that year. If you deduct $14K on a $75K income, your tax liability should go down by $4,151. So instead of your combined federal/provincial taxes being, say, $14,000 for the year (ballpark), they'll be $9,849. Then, your non-refundable tax credits get applied, and you'll probably use up all of those tuition credits, reducing that ~$9,849 liability down to, say, $2,849 (Federal+Provincial tuition credits aren't 1:1, but ballpark $35K of unused tuition amounts is worth $7K). Then, you will get a refund of the difference between the income tax withheld on your paycheques (say $14K) and the $2,849 you actually owe. ~$11K refund.

If you hadn't contributed to (or deducted) the RRSP that year, you'd owe the ~$14K in tax, less the same ~$7K in tuition credits, so if you had ~$14K withheld you'd get a ~$7K refund.

Basically, the one is not affecting the other, they're independent events. If you had a higher unused tuition amount balance, the RRSP contributions could end up effectively stretch your tuition amounts out farther (less desirable, government holding onto your credits for another year), as you can't reduce your tax liability below $0 (Tuition is a Non-Refundable tax credit), but in your case you're likely through the credits this year anyway.
Thank you for the detailed answer! Makes sense now.
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don242 wrote:
Mar 20th, 2017 12:34 pm
Tuition is a tax credit and nothing to do with the rrsp. It doesn't matter what tax bracket you are in, the tuition tax credit will always be the same.
Thank you for answer!
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If you are talking about federal tuition amounts, the CRA says
"You must claim this amount in the first year you have a tax payable." http://www.cra-arc.gc.ca/tx/ndvdls/tpcs ... d-eng.html

You might want to use a tax program to see what your tax payable is after your tuition credits are applied. Then decide whether to claim the deduction from your RRSP contribution. (While you must REPORT all RRSP contributions in the year they are made, you do not have to claim the DEDUCTION in the same year. You can use Schedule 7 to report the contribution and delay the deduction till another year when you will get more of a refund from it.)
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BetCrooks wrote:
Mar 21st, 2017 8:45 am
If you are talking about federal tuition amounts, the CRA says
"You must claim this amount in the first year you have a tax payable." http://www.cra-arc.gc.ca/tx/ndvdls/tpcs ... d-eng.html

You might want to use a tax program to see what your tax payable is after your tuition credits are applied. Then decide whether to claim the deduction from your RRSP contribution. (While you must REPORT all RRSP contributions in the year they are made, you do not have to claim the DEDUCTION in the same year. You can use Schedule 7 to report the contribution and delay the deduction till another year when you will get more of a refund from it.)
Yes I am talking about the provincial and federal amounts.

I do want to do that, but I don't know where I can find a program to do this (preferably free). So are you saying that I can put money in (invest with it etc) and not have to claim in next year?
That's basically my ultimate question - would it be better for me to use up my tuition credit FIRST then claim deduction AFTER all of it has been used?
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sheepe wrote:
Mar 21st, 2017 9:13 am
Yes I am talking about the provincial and federal amounts.

I do want to do that, but I don't know where I can find a program to do this (preferably free). So are you saying that I can put money in (invest with it etc) and not have to claim in next year?
That's basically my ultimate question - would it be better for me to use up my tuition credit FIRST then claim deduction AFTER all of it has been used?
Your $75k income, less the $14k RSP is all within the 29.65% bracket, meaning this is the value of your RSP credits should you deduct this year. Unless your income will increase rapidly in the next 1-2 years, its best to use them now.

Since the tuition credits are non refundable, they are always valued at the lowest marginal rates. Your net income after RSP, if you deduct is $61k, meaning taxes payable are about $11.6k. 20% of the $35k is $7k. In short, timing of your tuition credits does not matter as it will be depleted whether you deduct the RSP or not.
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Kasakato wrote:
Mar 21st, 2017 9:29 am
Your $75k income, less the $14k RSP is all within the 29.65% bracket, meaning this is the value of your RSP credits should you deduct this year. Unless your income will increase rapidly in the next 1-2 years, its best to use them now.

Since the tuition credits are non refundable, they are always valued at the lowest marginal rates. Your net income after RSP, if you deduct is $61k, meaning taxes payable are about $11.6k. 20% of the $35k is $7k. In short, timing of your tuition credits does not matter as it will be depleted whether you deduct the RSP or not.
Thanks!

So I can contribute the amount listed in the website NOW that states: "Your 2017 RRSP deduction limit is $14,015." or whatever?
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sheepe wrote:
Mar 21st, 2017 9:48 am
Thanks!

So I can contribute the amount listed in the website NOW that states: "Your 2017 RRSP deduction limit is $14,015." or whatever?
Yup.

You won't get a refund for it until next year's taxes (2018 for 2017 tax year), but your tax-deferred investment growth can start right away.
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