The best time to buy RRSP's could be when you are on Employment Insurance

Many Canadians were laid off for an extended period in 2016.  Many of these employees had high paying jobs.  It could be a great idea to start saving now, for the 2016 RRSP deadline, depending on their earnings.
    You shouldn't look at your tax bracket alone, when deciding if you will be buying RRSP's.  You should be calculating the net payback rate instead.  Much like the Credit Card Nerd GIS Maneuver, buying RRSP's in a lower tax bracket can pay off better than if you were in the top tax bracket.
    The reason why the net payback can be so high is because, you may be required to repay some of the EI benefits that you received.  If your 2016 net income from all sources exceeds $63,500 you will be required to repay 30% of the lesser of your net income more than $63,500 or the total regular benefits paid in the taxation year.
    You do not have to repay your EI benefits if your 2016 net income is less than $63,500, other conditions can also make you exempt from having your EI payments clawed back at tax time.  To learn more, read about EI and repayment of benefits at income tax time straight from the service Canada website.


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Credit Card Nerd Math

Example #1: We will use a resident of Saskatchewan that had $63,500 in employment income and $10,000 in EI benefits in 2016.  This works out to a $73,500 combined income from all sources.  This individual will need to buy $10,000 in RRSP's to eliminate the EI claw back.
    The $10,000 RRSP will save him/her (($10,000 - $3,000) x 33.5%) + $3,000 claw back = $5,345.  This works out to a net pay back of $5,345/$10,000 = 53.45% on their RRSP contributions.  The highest income tax bracket in Saskatchewan is 48% and that is for income over $200,000.

Example #2: We will use a resident of Saskatchewan that had $68,500 in employment income and $10,000 in EI benefits in 2016.  This works out to a $78,500 combined income from all sources.  This individual will need to buy $15,000 in RRSP's to eliminate the EI claw back.
    The $15,000 RRSP will save him/her (($15,000 - $3,000) x 33.5%) + $3,000 claw back = $7,020.  This works out to a net pay back of $7,020/$15,000 = 46.8% on their RRSP contributions.

Example #3: We will use a resident of Saskatchewan that had $68,500 in employment income and $5,000 in EI benefits in 2016.  This works out to a $73,500 combined income from all sources.  This individual will need to buy $10,000 in RRSP's to eliminate the EI claw back.
    The $10,000 RRSP will save him/her (($10,000 - $1,500) x 33.5%) + $1,500 claw back = $4,347.50.  This works out to a net pay back of $4,347.50/$10,000 = 43.475% on their RRSP contributions.  Even at this rate, you would need to earn more than $140,000 a year in Saskatchewan, to get a better net pay back from your RRSP contributions.

Example #4: We will use a resident of Saskatchewan that had $73,500 in employment income and $5,000 in EI benefits in 2016.  This works out to a $78,500 combined income from all sources.  This individual will need to buy $15,000 in RRSP's to eliminate the EI claw back.
    The $15,000 RRSP will save him/her (($15,000 - $1,500) x 33.5%) + $1,500 claw back = $6,022.50.  This works out to a net pay back of $6,022.50/$15,000 = 40.15% on their RRSP contributions.  Even at this rate, you would need to earn more than $127,000 a year in Saskatchewan, to get a better net pay back from your RRSP contributions.



Potential Tax Savings by reducing your earnings past the EI Payback Rate

Below we have a table with the payback rate of a $10,000 RRSP based on $73,500 earnings from all sources which includes $10,000 of earnings from EI.  For example, $63,500 in earnings will be on your T4 and $10,000 of your earnings will be on your T4E.


Province

Tax Savings via RRSP

British Columbia

49.7%

Alberta

51.3%

Saskatchewan

53.5%

Manitoba

54.9%

Ontario

50.8%

Quebec

56.0%

Newfoundland

54.6%

New Brunswick

54.7%

PEI

55.9%

Nova Scotia

56.0%



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Optimal Numbers

Please note that we used optimal numbers for the chart above for this tax savings example.  Your own tax scenario will more than likely differ from our examples above, but if you were on EI in 2016 and your income from all sources exceeds $63,500 (remember it includes your T4E income), then you may want to run the numbers on how much you can save by reducing your income via RRSP this taxation year.  Note: Once you have reduced your income to $63,500, there will be no EI claw back and any RRSP contributions will net you the same amount as any regular RRSP contribution at that tax bracket.


Source: EI and repayment of benefits at income tax time.