Dear Nancy Woods
I'm a recent graduate that just landed my first career job in the finance/accounting industry. I have tuition tax credits in the amount of $34,000 and un-used RRSP contribution allowance of $8,000.
My main question is how to use my tax credits. I have enough tuition credit to go totally tax free this year. I crunched the numbers and paying no tax in one year seems to net me more of a refund than spreading it out to stay within the lowest tax bracket (or out of the next highest).
Additionally, I have the luxury of being able to top up my yearly TFSA contribution and was going to put some away into my RRSP and claim the deduction later on. Are these the two most tax efficient savings vehicles I have available?
Signed Derek
Dear Derek,
It does make sense to use your tax credits in combination with your personal deduction and other possible tax credits to reduce your first year of income. For the tuition tax credits, CRA requires you to use them up as soon as you start having income.
Certainly make the maximum contribution to the TFSA and any past unused allowance. You can do this by either monthly or periodic contributions or when you get your income tax refund in the spring.
If you have the available funds, you should contribute up to the RSP contribution allowance amount. You can make the contribution within the limit and deduct it from future income. It doesn't have to be deducted from this year's income. This tax shelters the growth and income even though you are not taking the deduction.
The TFSA and RSP are presently the most effective tax-sheltering plans we as Canadians have. You can keep in mind that the other tax-free option is your principal residence, but there is no assurance it will go up in value. However, we don't know what the markets have in store, either.
Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. To ask her a question, send an e-mail to asknancy@rbc.com or visit her web site at nancywoods.com
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