Canada: Immediate Benefits

Last Updated: March 26 2019
Article by Samantha Prasad

If there is one thing I hate more than the end of the holiday season, it's the pressure to come up with some new year's resolution. And let's be honest – my dedication when it comes to going to the gym or will power in putting down that two-week-old shortbread cookie makes for a very short "New Year, New Me" period.

But if there is one thing I will make sure to follow through on, it's getting in my last-minute RRSP contributions in before the deadline.  But making sure you top up your contributions to maximize your deductions for 2018 is just the top of the taxsaving iceberg.  A properly taxplanned RRSP will reap immediate benefits to you in lowering your overall tax bill, especially if you have lower-bracket family members. Here are some planning tips to help you and your family make the most of RRSPs, especially if you are a businessperson or professional:

  • Dividends versus salary. If you have a company, bear in mind that dividend income does not qualify as "earned income", even if received from a corporation carrying on an active business.  Therefore, this may be a favourable factor in deciding to pay yourself a salary out of your company instead of dividends. And not only will it create a deduction for your corporation, it will increase your RRSP contribution room and create an opportunity for a personal deduction in respect of any RRSP contributions you make.
  • Building in Contribution Room for your family.   If you have a business, a prudent strategy could be to pay your children a salary.  Again, this can be deductible for your company as long as the wages are not unreasonably large, in view of the business-related services your children actually perform for the company.  So, if you are thinking of paying your three-year old a $50,000 salary, that might be too aggressive (unless he or she is a prodigy when it comes to bookkeeping!)  However, if your child is older and spends his after school or weekends helping out in the business, then paying him or her a salary will reap some great benefit.  In fact, if your child has no other income, it's possible to receive up to $12,069 for 2019 without your child paying any tax, because he or she can shelter this income by claiming the federal basic personal tax credit.

The salary your child receives should qualify as "earned income," so that he or she will be entitled to make an RRSP contribution based on 18 per cent of the salary.  Remember, with RRSP contribution limits eligible to be carried forward, this means that a child or other low-bracket family member may build up a "bank" of carryforwards, thus providing additional RRSP contribution room which can be drawn down when the individual reaches a higher tax bracket, e.g., when they get a job after graduating from university. If your kids are close to graduation, the salary and therefore the RRSP contribution room might be increased.   They may pay taxes in a low bracket, but instead of sheltering this income with an RRSP contribution, they could opt to save the contribution for after graduation, when they're in higher brackets and so the deduction is more useful to them when they actually have income.

By the way, these strategies are not limited to businesspeople: An employee can claim a deduction for salaries paid to an assistant (which may include, for example, secretarial assistance). Besides being deductible, the salaries allow the family member/assistant to claim an RRSP contribution. (Note: To claim these write-offs, you must complete Form T2200, which must be signed by your employer, but does not have to be submitted with your tax return.  The form certifies that you are required to defray these expenses as part of your employment arrangement.)

  • Distributions from corporations. Perhaps the single biggest tax break is the ability to earn business income in a corporation. Lucrative small business tax rates mean that, depending on the province, your company can pay tax at about 13.5 per cent (for Ontario).

However, corporations cannot make RRSP contributions. And owner-managers cannot make such contributions unless they have "earned income".  So, if you have no other sources of "earned income", it generally makes sense to distribute funds in the form of a salary from the company in order to fund RRSP contributions.  This strategy almost always makes sense if the distributions leave you in the bottom "significant" tax bracket. Here's why: Although the applicable personal tax rate near this level may be a bit higher than the company's, by making an RRSP contribution, you are effectively cutting your taxes by 18 per cent, which usually leaves you at close to the same rate as your company would pay if it did not distribute the income.  You will also have taken the remainder of the money out of your company, so that you may now use it as you wish.  Finally, the investment income from your RRSP will compound tax free in your RRSP, instead of being earned by your company and subject to ongoing taxes.

Strictly speaking, distributions which take you out of the lowest tax bracket may be less "tax-efficient."  But in most cases, the owner-manager will need the extra dough i.e., to live on so distributions will be necessary in any event.  If so, such distributions should usually be made in the form of salary (rather than dividends, which do not qualify as "earned income") until your "earned income" is enough to allow for a maximum RRSP contribution. Note: the maximum RRSP limit for 2018 is $26,230.  This means that, because RRSP contribution limits are based on prior-year "earned income", 2017 "earned income" of $145,724 will allow a maximum 2018 contribution.

The Dribble Effect. One of the big reasons banks can rack up big profits is that they pay you very little interest on cash balances in bank accounts, especially when it comes to your RRSP.

The effect of low deposit rates can be insidious.   At any given time, there isn't much money at stake.   But slowly and surely, the lost interest dribbles away. After a while, those dollars can really mount up and they go right into the bankers' pockets.

Here are five ways to guard against the "dribble effect:"

  • Shop for the best rates on RRSP and other cash balances.
  • Put your RRSP into strip coupons.  These financial instruments lock in the interest until maturity.  In the meantime, there are no cash payments dribbling into your RRSP.
  • Get into the habit of reviewing RRSP statements monthly for idle cash balances.
  • If better rates are offered on larger balances, and you have several RRSPs, consider consolidating them into one account.
  • Use cash balances to invest in a money market fund. There are usually no fees for these funds, with low MERs.

Which investments should be held in your RRSP?    It has been said that you should hold high-tax investments in your RRSP and low-tax investments outside your plan.   But which investments are high-tax?   Traditionally, these have been interest-bearing investments. Stocks and equity funds, on the other hand, may qualify for capital gains treatment (50 per cent of a capital gain is tax-free), as well as the dividend tax credit if a Canadian company.   These benefits are lost if you hold through your RRSP, since retirement and other amounts you receive from your plan are fully taxable.   So, if you have investment capital both inside and outside your RRSP and you wish to invest in both equities and fixed-income investments, it is generally better to hold the former outside your RRSP and the latter inside your plan.

Can equities be high tax?

A case in point arises if you're contemplating a big short-term capital gain.   In this case, the equity investment could, in effect, become high-tax, since you have to pay this tax for the year you sell, while the gain can be tax-deferred in your RRSP.

Owning short-term-hold equities in your RRSP could defer capital gains tax for years giving you the opportunity to take profits and reinvest on a taxdeferred basis.   In some cases, this may more than make up for the tax breaks you get by holding outside your RRSP.

Tax tips:

  • It may make sense to hold part of a high-appreciation equity position the portion you may liquidate in your RRSP. (Careful though: transferring existing investments into your RRSP triggers capital gains tax, if they've appreciated in value.)
  • If an equity is a long-term hold, the "outside-the-RRSP" strategy still applies.
  • Finally, it makes little sense to select your investment portfolio just to get the tax benefits.   For example, if you like an equity investment, then by all means invest through your RRSP if that's where your capital is. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions