#midwifemonday - An RRSP Contribution Does NOT "wipe out" your taxes

A lot of midwives (and self-employed individuals) are in a different position than the typical employee. If they are early in their career – they will find themselves in the position where they owe when it comes to tax time since there are no tax dollars “withheld” like there is at payroll time.

For those who have been self-employed for a while – they will usually end up making instalment payments which helps recreate the “payroll tax” effect where most or all of your taxes are paid up front BUT there is still a bit of uncertainty for most midwives as they approach tax time.

“Will I owe? If so – how much?”

There is a bit of a misunderstanding of how RRSP contributions work in this context. Many people who are new to the mechanics of how RRSP contributions work mistakenly believe that a contribution to an RRSP might offset your taxes dollar for dollar. That is – a dollar contributed to an RRSP means a dollar less in tax paid.

Sadly – while amazing – RRSP’s aren’t THAT amazing.

RRSP contributions function as a “deduction”. What that means is they reduce the amount of “income” that you report on your tax return and owe taxes on.

If you made $150,000 before RRSP contributions in BC – you would owe $39,697 (Source - https://www.eytaxcalculators.com/en/2024-personal-tax-calculator.html).

An RRSP Contribution of $20,000 means you get to now report $130,000 as your income and as a result – you owe $31,646.

$39,697 - $31,646 = $8,051

You contributed $20,000 to your RRSP to avoid $8,051 in tax (For my BC readers – reminder – every province has a different tax rate). It means you are still net negative $11,949 in your bank account to make that RRSP contribution.

So if you show up to your meeting with your advisor and say “I’ve saved $39,697 for my taxes – now – what can we do with this?” Your advisor will say that all you can do is pay your taxes. Any money put to an RRSP – while a deduction – will leave you with not enough money to pay your taxes.

?

So what’s the key takeaway?

For midwives (Or any self employed person) just starting out – in addition to saving for your taxes – you need to save SEPARATELY for your investment buckets. If you have just pulled together enough to pay your taxes only – there’s precious little your advisor can recommend because as we showed above – it’s not a dollar for dollar offset. If you owe

For most midwives after they start earning true full billable course of care income – I suggest setting aside 25%-30% of their income for CPP & taxes and then savings is on top of that.

For midwives who are in the instalment phase of things – great! Then for the most part you have already done some of the hard work but remember – periodic increases in your income (Inflation adjustments to your BCC income, taking on more BCC’s, etc) means you still need to adjust for some additional savings as well and in addition to that you need to intentionally set aside additional funds to invest.

It's only when you have those additional funds that your advisor will be able to tell you “yup – those will be best used in an RRSP/TFSA/FHSA/Other based on your tax situation”.