Your Child Can Earn Money Tax-Free
There is a basic amount of income that taxpayers are able to earn tax-free every year. This personal amount is linked to the Consumer Price Index, which serves as a useful indicator of changes in consumer prices in Canada over time. Historically, it increases slightly each year.
The most recent personal amount is $12,069. This means that individuals do not have to pay personal income tax on any amounts less than this. This is called the basic personal tax credit.
If your child did not earn much income and did not pay any withholding taxes, he would neither owe taxes to the government nor receive a refund. However, if the employer of a child deducted some income taxes from the child’s earnings, the amount deducted can be claimed on the child’s tax return and will possibly be refunded.
Growing Your RRSP Contribution Room
Registered Retirement Savings Plan contribution room is calculated based on a percentage of earned income each year that is reported to the CRA. For every year that earned income is reported, the contribution room for the following year increases. This room allows for a taxpayer to defer his taxes to later years.
For example, if a young person begins declaring income early in life, he can get a jump-start on growing his contribution room. After a few years of earning income under the basic personal amount, he may have accumulated a few thousand dollars of contribution room. Later on, when he begins to work full-time and earn more money, he can utilize this additional RRSP room to defer his tax bill.
Additionally, increasing the contribution room of an RRSP early in life can help Canadian taxpayers with the purchase of their first home. A maximum of $25,000 can be withdrawn tax-free from an RRSP for the purchase of a home by a first-time buyer.
Another RRSP use that can be utilized early in life is the Lifelong Learning Plan. Under this plan, one is able to make tax-free withdrawals from an RRSP to support educational or training programs.
Understanding How Taxes Work
Income tax rules, regulations, and procedures can be complex and hard to understand for youngsters. If parents are able to find the time to teach their children about these topics early on, their children may develop a better understanding of our tax system, which may help them to better plan for their futures in terms of their finances. The process of learning about how to prepare one’s own income tax return could certainly lead to further important discussions about budgeting and savings.