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Simple tactic gives children a bigger RRSP bang

Carmelo Linardi, centre, of Newmarket, Ont., has filed tax returns for his children, including Vincent, left, and Maria, since they were young.

PETER POWER/THE GLOBE AND MAIL

THE NEXT GENERATION

Simple tactic gives children a bigger RRSP bang

A simple tactic to help your children get the biggest bang from their RRSPs, even if they're years away from a steady income

Terrence Belford

Every year at this time, since his son Vincent was in his early teens, Carmelo Linardi, a chartered accountant in Newmarket, Ont., has done the boy a favour many parents overlook. The result has been both cash in the bank and the certainty of more to come, all the way to retirement, as now 22-year-old Vincent makes his way in the world.

What was this gift that keeps on giving? Simple: Mr. Linardi filed a tax return in Vincent's name.

The benefits have proved so great that he followed through with the rest of his children: Maria, 18, Laura, 17 and Angela, 14. It did not matter if their income was a few hundred dollars from babysitting or thousands earned from a summer job. Nor did it matter if their income was well below the minimum threshold at which income taxes kick in (which is $9,600 for the 2008 tax year).

The simple act of filing a return enabled each child to claim a range of deductions and tax credits, which can be carried forward indefinitely - including a solid chunk of extra room to make registered retirement savings plan contributions in years ahead.

If the Linardi children save those RRSP deductions until they are well launched in a career, it could mean big tax savings in their peak earning years.

In some provinces, such as Ontario, children age 16 or older can even get a $100 cash refund from the GST credit as well. Instant cash just for filing a return.

"I tell them to look on it as a nest egg," Mr. Linardi says. "They can, in certain situations, get some cash back now but going forward they will have those extra RRSP deductions when they need them most."

Better yet, there is no downside to having a child file a tax return, says Tracy Broeze, a financial adviser with Excel Plan Financial/FundEx Investments Inc. in Burlington, Ont. She has been doing it for her three children, aged 20, 18 and 17, since the eldest started working part-time at age 13.

"It just takes a few minutes to file a basic return and you can even do it with free software on the Canada Revenue Agency website [www.cra-arc.gc.ca]," Ms. Broeze says. "And while the amounts may not seem like much every year, they do add up when you consider 18 per cent of all income earned between when a child starts his or her first part-time job until they are working full-time can be put toward future RRSP contributions. There is just no disadvantage."

So why don't more parents take advantage of this potential source of immediate income and future tax savings, including RRSP options?

"I think many are just unaware of the benefits," says Tina Tehranchian, a certified financial planner with Assante Capital Management Ltd. in Newmarket. "Many of my clients are small business people; they take advantage of it because they are used to having accountants advise them on how to maximize tax benefits.

"For ordinary wage-earners, however, they probably never thought of it."

Ms. Tehranchian has been filing returns for her son Joobin, now 21, since he first started working part-time in her office when he was 11. "He now has thousands of dollars in unused RRSP deductions," she says. "At some point when he is earning full-time income he can then use them to reduce his tax burden significantly."

But it is not just those future tax benefits that can accrue, Ms. Tehranchian points out. Once children hit age 16, there is that $100 Ontario GST tax credit, and if they go on to university they can report (though not deduct) items such as tuition, $400 a month in education expenses for full-time students ($120 a month for part-time students) and $65 a month for books for full-time students ($20 a month for part-time).

"Chances are the child's income is not high enough to attract income taxes so he or she can just carry forward all those expenses indefinitely until high-earning years when they can be used to significantly reduce taxable income," Ms. Tehranchian says.

In some cases, employers may inadvertently deduct Employment Insurance premiums, Canada Pension Plan contributions or withholding taxes from a child's summer or part-time job, says David Phipps, a financial adviser with Assante Capital Management Ltd., in Ottawa. By filing a tax return, the child can get those sums back (as long as personal income is not above that $9,600 threshold for 2008, or $10,320 for 2009).

There is also another benefit, Mr. Phipps says: The education process that goes along with filing returns and financial planning in general.

"This is a great way to help them learn about things like RRSPs and the benefits they bring," he says.

"While as minors they can't open their own RRSP until they are 18, they can start the educational process and see how it all works."

Special to The Globe and Mail

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