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What can tax credits, RRSPs, RESPs and HBPs do for me?

tips for young families

Many young families struggle with competing financial goals. Should you buy or renovate a house?,Pay down debt, such as student loans or credit cards? Or save and invest in an RRSP? There are tax advantages for each of these choices. Make sure you factor these into the decision you make.

Invest in an RRSP (Registered Retirement Savings Plan)

As soon as you start working and have “earned income”, you should begin contributing to an RRSP. This will lower the taxes you owe. This means you may have less tax taken off your pay. Or, you may receive a refund after you file your tax return.

You can use the tax savings to pay off “bad debt,” such as what you owe on your credit cards. Or, if you don’t have credit card debt, you can use the extra money to save for a house or pay down your mortgage.

A mortgage is viewed as “good debt” because you are using the loan to buy an asset that will likely rise in value over time. In most cases, though, it’s wise to pay it off as fast as you can. The interest on your mortgage is not tax deductible. An exception to this rule is discussed under Tax tips for the self-employed.

Learn more now on the benefits of contributing to an RRSP: read Use the Tax System to “Pay Yourself First” and Get a Raise. Also read Tax Tips for when you are planning and saving for retirement.

Principal Residence Exemption

Buying a house is a good investment for many reasons:

  • It allows you to build wealth over time as housing prices rise and you pay down your mortgage.
  • It can protect you from inflation. When you pay off your home, you don’t have to worry about rising mortgage or rental costs.
  • It can also be used to create income. For example, you can set up a home office, run a bed and breakfast or rent out part of your home full-time.

In terms of taxes, the best reason to buy a house is that you don’t pay tax on any money you make when you sell your principal residence. Note: if prices go down and you lose money selling your home, you cannot claim the loss on your tax return.

Home Renovation Tax Credit (HRTC)
This one-time non-refundabletax credit was introduced for the 2009 tax year. Its purpose was to stimulate spending in the housing sector and boost the economy. The credit is for qualifying home renovations made between January 28, 2009 and January 31, 2010

What if you qualified for the tax credit but forgot to claim it on your 2009 tax return? You can request an adjustment to your 2009 income tax return. You must file a T1-ADJ form.

What you can claim: You can claim 15 per cent of qualifying expenses that cost more than $1,000 but less than $10,000. A maximum of $1,350 for each family applies. Qualifying expenses include the cost of labour, building materials, fixtures, equipment rental etc.

Learn more now about eligible expenses from the Canada Revenue Agency.

Home Buyers’ Tax Credit (HBTC)

This non-refundable tax credit is for first-time home buyers who buy a qualifying home after January 27, 2009. For 2009, the credit will be $750. To calculate the amount, you multiply the lowest personal income tax rate for the year (15% in 2009) by $5,000.

To qualify: you and your spouse or common-law partner may not have owned a home in the current year or any of the prior four calendar years. Learn more now from the Canada Revenue Agency.

Tax-Free Withdrawal from RRSP Home Buyers’ Plan (HBP)

You may withdraw up to $25,000 tax-free from an RRSP to buy or build a qualifying home for:

  • yourself, or
  • someone with a disability who is related to you.

You must repay the money you withdraw within 15 years.

Learn more now from the Canada Revenue Agency.

Saving for Children’s Education (RESP)

The government created RESPs to help Canadians save for their children’s studies after high school. You must pay any tax due on the money you contribute. But you do not pay tax on any income you make investing your savings as long as the money stays in your account.

Even better, if you save money in an RESP, the government will also contribute to your plan. These grants are called Canada Education Savings Grants (CESG). The maximum you may receive for each child is $500 a year, to a lifetime limit of $7,200. Lower income families may receive extra grants.

Tip: Try to contribute at least $2,500 per year, to take advantage of the CESG and this 20% risk-free return.There is no annual limit, but the lifetime total you can contribute for each child is $50,000.

Anyone can open and contribute to an Individual RESP. This includes parents, grandparents, aunts, uncles and friends. If you have more than one child, you can open a Family RESP. For Family RESPs, the contributor must be related by blood or adoption to your children.

Learn more now from the Canada Revenue Agency. Or, read How do I develop a plan to save for a child’s education?

Children’s Fitness Amount

The CRA created this non-refundable tax credit to encourage physical fitness in children. It applies to fees you paid in 2010 to register your child (or the child of your spouse or common-law partner) in a program for physical activity. The program must require a significant amount of physical activity and be:

  • ongoing – for example, it must last at least 8 weeks, once a week. For children’s camps, it must last at least 5 days in a row
  • supervised
  • suitable for children

You may claim 15 per cent of the fees you paid, up to $500 for each child. The maximum credit is $75 for each child . Learn more now from the Canada Revenue Agency. Or, read our Tax tips for when you are planning and saving for retirement.