Free cash? Yes, it can be found

National Post

2007-10-13


So-called builders face multiple, sometimes conflicting, financial planning priorities: paying down the mortgage, saving for the kids' post-secondary education, contributing to an RRSP and, if there's anything left over, starting to build that nonregistered nest egg. Here are some tips to help you make the most of the tax opportunities available to you:

MAXIMIZE FREE MONEY

There is nothing better than free cash. If you've got kids, be sure you're taking advantage of the maximum benefits, credits and grants available to you.

Child credits For starters, there's the Universal Child Care Benefit (UCCB), which was introduced by the government in the 2005 Budget. The payments, equal to $100 per month for each child under the age of six, began in July, 2006.

If you have been receiving the Canada Child Tax Benefit, you should automatically be receiving the UCCB as well. Higher-income Canadian families who are not eligible to receive the CCTB, must apply for the credit using the application form, which can be downloaded from the CRA's Web site.

If your kids are over age six, this year's budget introduced the new non-refundable Child Tax Credit, which is equal to $2,000 per child under the age of 18, multiplied by 15.5% (the federal tax credit rate for 2007).

This translates into a tax credit of $310 per child under the age of 18, which will be claimed when you file your 2007 tax return next spring. Neither the UCCB nor the new Child Tax Credit are in-come-tested and can add up to some serious coin.

Education grants Also, don't forget to begin saving for your kids' post-secondary education by contributing to a Registered Education Savings Plan (RESP).

While the annual contribution limit has been eliminated, allowing you to contribute up to the lifetime maximum of $50,000 per child, you should ensure you contribute enough to take full advantage of the free money in the form of the Canada Education Savings Grants (CESG).

The basic CESG is equal to 20% of the amount you contribute, up to a maximum of $500 per child annually. For years prior to 2007, the annual CESG maximum remains at $400 per child, which is relevant for those making "catch-up" RESP contributions.

Note, however, that the maximum CESG available in one year is $1,000, which includes both the current and any prior years' catch-up CESGs.

Lower and middle-income families can also take advantage of additional federal grants beyond $500 per year, and at least two provinces, Alberta and Quebec, have introduced their own provincial grant programs for additional free money.

MORTGAGE VS. RRSP

After collecting your free cash, the next priority is to choose between paying down your mortgage or maximizing RRSP contributions.

Hedge your bets While much numerical analysis has been done in an attempt to settle this debate, it boils down to whether you think the rate of return on your investments inside your RRSP will exceed, over the long term, the non-deductible interest rate on your mortgage.

That is why the most common advice given is to hedge your bets and do a bit of both: maximize your RRSP contribution, then use the resulting tax savings to pay down the mortgage.