Tax and Benefits Analysis: Example For A Young Family

Families with children under the age of 17 will be eligible for additional government benefits that individuals and couples will not have access to. These government benefits include the Canada Child Benefit or CCB, which is a very generous government benefit. The Canada Child Benefit has a clawback rate that depends on the number of children, the more children under the age of 17 the higher the clawback rate. The clawback rate reduces the amount of Canada Child Benefit received as taxable income increases.

The government benefit clawbacks can become quite high for families when we consider all the benefits they could be eligible for. The combination of income tax rates, and government benefit clawback rates is called your Marginal Effective Tax Rate and can reach as high as 60% to 70% in some family situations. In some cases, this can make it very attractive for families to make RRSP contributions while children are young.

For those starting a family, or expanding their family, anticipating these future government benefits can help them make strategic decisions around TFSA vs RRSP contributions.

If you know that your marginal effective tax rate will be higher in the near future, you may prioritize TFSA contributions now and keep your RRSP contribution room for later when you have a family.

Similarly, if you know that your marginal effective tax rate will be lower in the near future, perhaps as children reach age 17, you may prioritize RRSP contributions to get a boost in government benefits while the children are under 17.