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How to use RRSP contributions to avoid EI clawback
10/17/2018 11:17:12 PM
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Tax and investment know-how from a leading Canadian financial education institute.



By Knowledge Bureau  | Tuesday, March 20, 2018


 

TAX PLANNING FROM THE KNOWLEDGE BUREAU



By Evelyn Jacks

Are you a high-income earner – perhaps an executive, or a seasonal construction or oil rig worker – who may suffer a loss of employment? If the Canada Revenue Agency catches you with income above the base amount for Employment Insurance (EI) repayment, you’ll likely be unpleasantly surprised when you file your 2017 return. But there’s a way to avoid the clawback by using your RRSP deduction opportunities.

Taxpayers who receive regular EI benefits more than once in any 10-year period are required to repay them via the the lesser of 30% of the benefits received and income in excess of the base amount.

For the 2017 tax year, the base amount for EI repayment is $64,125. The amount is indexed year over year. You will experience a marginal tax rate of 62% on income over this clawback threshold, as a portion of EI benefits received would have to be repaid.

However, with an RRSP contribution, this might be avoided. Here’s an example:

Example: Andre, who lives in Ontario, was laid off late in the year and received $3,000 in regular EI benefits. His T4E slip shows he is required to repay his benefits at a rate of 30% because he previously made a claim for regular benefits when his former employer became insolvent. On his T1, Andre’s net income before adjustments is $67,000. He will need to repay the lesser of 30% x $3,000 = $900 and 30% x ($67,000 – $64,125) = $862.50

As Andre lives in Ontario, his marginal tax rate is 29.65% (that is, he’d pay $29.65 more taxes if he earned $100 more in taxable income).

A $100 RRSP deduction would reduce his tax bill by $59.65 when the EI clawback is taken into account. Taxpayers in this situation can obviously benefit handsomely from an RRSP contribution!

The moral of this story: Use your RRSP contribution room and deduction opportunities wisely to decrease the net income upon which the clawbacks are determined. It’s too late in the year now for this strategy – the contribution deadline for 2017 has already passed – but if you have any undeducted contributions from prior years, be sure to use them to offset the clawback on your 2017 return.

Evelyn Jacks is the founder and President of Knowledge Bureau, which brings continuing financial education in the multiple areas of specialization to advisors and their clients. She is the author of 52 books on tax and wealth planning. This article originally appeared in the Knowledge Bureau Report, © 2018 The Knowledge Bureau, Inc. Reprinted with permission. All rights reserved. Follow Evelyn Jacks on Twitter @EvelynJacks. Visit her blog at www.evelynjacks.com.

Evelyn Jacks’ latest book, NEW ESSENTIAL TAX FACTS: How to Make the Right Tax Moves and Be Audit-Proof, Too is available for pre-order now.

Notes and Disclaimer

©2018 by Fund Library. All rights reserved.

The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

 
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