Did you know?: Creating RRSP contribution room for a minor

Jan 23, 2020 | Christos Koutsavakis


The eleventh entry in our Did you know? series looks at why it is important to help your minor child file a tax return.

Canada’s teenagers are an industrious lot. When not doing schoolwork they can be found earning a wage in an assortment of jobs. Baristas, cashiers, receptionists, servers, dishwashers, stockers, lifeguards, ushers, babysitters, tutors, and even ice cream scoopers, they all know the value of a hard-earned dollar. But are they missing out on a tax advantage?

Imagine this scenario: a minor earns an income below the basic personal exemption ($13,229 for earners under $150,473 in 2020) and owes no income tax. Owing no tax, no income tax filing is required. The minor ought to file a tax return anyway because earned income documented with CRA generates RRSP contribution room at a rate of 18% of earnings.

In a nutshell: by filing a tax return even though no taxes are actually owed, a minor will accumulate RRSP contribution room that can carry forward indefinitely. In the future, typically when the minor is an adult earning a higher income, he or she can finally make an RRSP contribution and receive a tax deduction. While tax rules allow minors to open and contribute to RRSPs, not all institutions accommodate accounts for minors. Postponing contributions until earnings are in a higher tax bracket may be the optimal choice for most earners in any case.

One way this could really matter: a diligent worker earns $5,000 a year for 5 years and accumulates $5000 x 5 x 18% = $4,500 of RRSP contribution room. Saving this amount at, say, age 25, and growing it at 6% for 40 years, would result in a nest egg of $46,285 at age 65.

See our article for more details: Create RRSP contribution room for a minor