You've just graduated and you've started your first job. Congratulations! Here are a couple of tips to help you get a head start towards a lifetime of tax savings:
Be careful with student debt
Still struggling to pay off those student loans? You're not alone as this is generally the first financial priority for 20-somethings. Fortunately, if the loan was made under the Canada Student Loans Act, the Canada Student Financial Assistance Act, or similar provincial or territorial laws, you can claim a non-refundable tax credit for the interest you pay on such loans.
But be wary of promotions from financial institutions offering loans (often lines of credit) with lower rates of interest than your current student loan. The tradeoff for a lower rate may be sacrificing your interest tax credit.
That's exactly what happened in a 2003 tax case when an MBA student refinanced nearly $25,000 of student debt originally obtained under the Canada Student Loans Act with a line of credit from the Bank of Nova Scotia. The Canada Revenue Agency denied his interest expense credit since the line of credit from the bank was not a qualifying loan.
So, before refinancing that student loan with a line of credit, do the math to ensure that the savings you're getting on the lower interest rate are greater than the value of the interest credits you're forgoing. Start an RRSP One of the best habits to get into as a newly employed income-earner is to begin a systematic savings program by contributing to an RRSP. Many employers offer direct savings plans whereby RRSP contributions can be made automatically from your paycheque.
The advantages of having the funds come directly off your paycheque are twofold: First, you never see the money so you won't miss it. Secondly, your employer can reduce the amount of tax withheld at source from your paycheque to take into account the deductibility of your RRSP contributions. This has the added benefit of increasing your regular cash flow by essentially receiving your tax refund throughout the year instead of waiting until you file your annual return next spring.
Finally, assuming you also wish to buy a condo or house in the next few years, by contributing regularly to your RRSP, you will be setting yourself up to participate in the federal Home Buyers' Plan (HBP), which allows you access up to $20,000 from your RRSP, tax-free, to purchase your first home. The amount must then be repaid over a maximum of 15 years.
By starting your RRSP contributions early, not only will you begin reaping immediate tax savings, you will also be saving towards your down payment, as withdrawing money under the HBP is often the primary source of a down payment for young couples purchasing their first home. But more about that next week.