referrals | Financial Crooks

A question came up recently on RedFlagDeals from someone looking to the future and trying to improve their tax refund in 2016 for their 2015 taxes. The person said that when he and his wife did their tax returns for 2014, they received some of the Family Tax Cut, but not the maximum of $2 000 per family. His wife is working and has unused RRSP room but is in a low tax bracket and therefore they haven’t bothered to have her contribute much to her RRSP. He wanted to know, if his wife contributed to her RRSP in 2015, would it increase their Family Tax Cut to the maximum of $2 000; I wasn’t sure so I ran some test cases to see if he could get the maximum by having his lower income partner put more into her RRSP.

What Is the Family Tax Cut Based On?

If you look at Schedule 1-A you’ll see that the Family Tax Cut is calculated using your taxable income from line 260 of your return. Line 260 occurs after your income is adjusted for any RRSP contributions.

In this question, the person wants to know if the lower-income spouse should reduce their income even further by contributing to their personal RRSP to get the highest possible Family Tax Cut.

The arithmetic answer is Yes. By contributing to their personal RRSP, the person making the least money can increase the amount that can be used for the “paper” transfer from the higher income person to the lower, and therefore they can maximize their Family Tax Cut up to the limit of $2 000.

Can Everyone Benefit With a Higher Family Tax Cut By Contributing More to a RRSP?

No.

Some families are already receiving the maximum $2 000 family tax cut. Changing RRSP contributions will not increase the amount.
In some families the two incomes are very similar. Although a RRSP contribution might increase the Family Tax Cut, it may not increase it significantly. If this situation applies to you, you might want to test the benefit yourself using free tax software for 2014 from StudioTax or GenuTax Standard. Try adding the increased RRSP contribution to the lower income spouse’s return and then check Schedule 1-A to see what, if anything, changed with the Family Tax Cut.
In some families, the lower income earner does not have any RRSP room. (For example, they might only have investment income.) Without personal RRSP room they cannot change the Family Tax Cut calculation.

NOTE: Contributions to a Spousal RRSP by the higher paid person for the benefit of the lower paid person do NOT increase the Family Tax Cut.

What Is the Possible Downside of Having the Lower Income Partner Contribute More to a RRSP?

It’s important to also look at this from a long-term tax perspective.

If the lower earning partner does not make much money, they will not get much of a tax refund for their RRSP contribution if they claim the deduction immediately. (And they must claim the deduction to get the higher Family Tax Cut.)

Then, when they eventually withdraw the money from the RRSP either in retirement or for an emergency, they will have to add the amount to their taxable income at that time.

This could mean they will pay tax at a higher rate on the RRSP money when they take it out than they received back as a refund and as a benefit from increasing the Family Tax Cut when they put it in.

For example, say someone has an income of $20 000 and contributes $5 000 to a RRSP in order to maximize the Family Tax Cut. In the test case I ran, that person received a tax refund of about $1 215 and increased their Family Tax Cut by $323.

Now suppose when she retires she is receiving

$8 000 a year in CPP,
$6 000 a year in OAS, and
$40 000 a year from a pension and investments.

If she takes out $5 000 from her RRSP, she will owe $11 498 in tax if she lives in Ontario, based on the 2014 tax rates.

If she doesn’t withdraw the $5000 her income tax is only $9 940.

Her tax increase is $1 558.

She is paying $20 more in tax than she saved. That’s not a very large amount, fortunately.

She will also have to pay income tax, however, on any investment income and capital gains generated by that $5 000 while it was in her RRSP when she withdraws the money from her RRSP or RRIF.

The calculation of whether it’s a good idea can get very messy:

What will the tax brackets and rates be when she withdraws the money from her RRSP/RRIF?
How much has inflation increased between when she saves the money and when she has to pay the income tax on the withdrawal?
Will the family invest the money saved using the Family Tax Cut and if so, what return will it generate to offset the future tax liability?

I can’t simply say that it’s a good idea or not to make a RRSP contribution to maximize the Family Tax Cut. It will depend on too many factors. You should consider some of the possibilities, though, before deciding how to best use your money.

Related Reading

Join In
Have you tried to optimize your Family Tax Cut by tinkering with RRSP contributions? Are you one of the majority of Canadians who doesn’t benefit from this Cut so you don’t care? Please share your views with a comment.

Not all bank brokerages pay an incentive to encourage referrals of customers wanting to open a new RRSP, TFSA, or investing account at their institution. For example, CIBC Investor’s Edge does not have a reward system at this time. I invest with BMO InvestorLine. [UPDATE: And RBC Direct Investing and CIBC Investor’s Edge.] I’m happy enough with InvestorLine’s services that I could recommend them to my mother and not have to worry about facing her about it at our next meeting. So I wondered, does BMO InvestorLine offer any kind of bonus if I refer them a new customer?

Yes, BMO InvestorLine Has a Referral Bonus Program

The answer was yes! BMO InvestorLine does reward both the person making the referral and the person setting up the new account at InvestorLine. They will pay a bonus for a new

RRSP
spousal RRSP
RRIF
spousal RRIF
cash or margin, (individual or joint) investment account (non-registered account)
corporate account
sole proprietorship account

This round does not seem to reward opening a new RESP or a new TFSA unfortunately, in 2019 and 2020.

The account must be opened with a minimum of $5000 of net new investment money.

How Does BMO InvestorLine’s Referral Cash Reward Program Work?

Say I’m a happy BMO InvestorLine customer (which I am.) I can give any friend or relative my Referral Code. When they fill out an account application form, they include this referral code.

Specifically, when they visit the BMO InvestorLine website and click on Open an Account, the first Welcome page asks them to select the type of account they wish to open. A bit further down the page it says, “Enter a Promotion Code or Referral Code below.” The Referral Code should be typed into the Refer a Friend Code box.

When they click on Open New Account it will take them to a page describing the Refer a Friend program.

Some of the important details

to get a reward $5,000 of “net new assets” must be deposited in the new account
the account balance must remain $5000 or higher for the next 90 business days (3 months)
no reward money will be deposited by InvestorLine until after 45+90 = 135 days have elapsed
the bonus money will be deposited directly into the account. So if a person opened a new RRSP it would be deposited in their RRSP account.
the InvestorLine bonus does not count as a contribution to a registered plan as far as the government is concerned. For example, you don’t have to claim it as an RRSP contribution on your taxes. It’s more like interest earned on an investment.
the new customer gets a bonus of $50 for an investment of $5 000 new net assets or more in a new account
the existing customer gets a $50 bonus too
It only works for one InvestorLine account. If you open more than one account, at any time, only the first account can get a reward.
The money for the new account cannot be coming from any BMO-related company like Nesbitt Burns or BMO mutual funds.
The money has to stay in the new account for the entire holding period (90 days) plus the payment waiting period (45 days) to get the bonus. [They must be tired of people opening accounts to get $50 and then transferring the money out. It’s probably why they are excluding TFSA accounts as people can take money out so easily from a TFSA.]

Program terms can change at any time, of course, so it’s always worth checking again before opening a new account.

FinancialCrooks, Can I Use Your Referral Number?

Well, since the only ones reading this blog seem to be my friends and relatives, I guess that means yes, you can use my referral number if you are opening a new InvestorLine account.

UPDATE: As of January 2014, it’s an email address now, not a number. As of January 2019 My Refer a Friend Code is: an email address.

if you take out all the extra spaces and the *** characters

I may find that I can’t keep the address up here if I get too much spam. In that case, if you add a comment to this post, I can email you my email, but I must admit I don’t check for comments every day, unfortunately.

Remember I will get a bonus if you use this code. (And I will have to declare it on my income taxes, unlike you, because I’m sure the government would consider any profit made from this post of mine to be a work-related benefit.)

The referral bonus rules are at

https://www.bmoinvestorline.com/selfDirected/pdfs/raf_tc_e.pdf

Related Reading

Join In
Does your brokerage pay an incentive for helping to encourage new customers? Please share your experiences with a comment.

Financial Crooks

An Honest Crooks Shares Financial Tips and Investing Experiences

Tag Archives: referrals

Does BMO InvestorLine have a Referral Bonus for Convincing Friends and Relatives to Open a New Account?

Yes, BMO InvestorLine Has a Referral Bonus Program

How Does BMO InvestorLine’s Referral Cash Reward Program Work?

FinancialCrooks, Can I Use Your Referral Number?