RRSP and FHSA: Maximize Your Tax Refund With Reward Points

It’s often said that the best use of reward points is for travel. However, if we play our cards right, an RRSP or FHSA contribution can easily beat travel rewards redemptions.

First, the RRSP is a savings vehicle for retirement or to finance the purchase of a first home (HBP). The main advantages are:

• Returns grow tax-free;
• RRSP contributions can reduce taxable income (generating tax refunds, family allowances, various credits, etc.).

The FHSA is a savings account created in 2023 to help you buy your first home. The main advantages are :

• Contributions reduce taxable income in the same way as RRSPs, which offer the same range of tax benefits;
• Earnings are not taxed like the TFSA;
• No obligation to repay the money withdrawn from the FHSA unlike an RRSP;
• Up to $8,000 per year, $40,000 total contribution limit.

When we talk about a tax refund, we are talking about a tax savings. In fact, when deductions are made for RRSP or FHSA, the tax payable is recalculated at a lower rate, since income is lower.

Since the tax deducted from each paycheck does not take these deductions into account, we get a tax return (refund).

Many institutions offer the possibility of using your reward points to invest directly in your RRSP or TFSA:

• NBC À la carte Rewards Plan
• RBC Avion Rewards
• CIBC Aventura
• BMO Rewards
• BONUSDOLLARS Desjardins

Let’s take the example of the National Bank of Canada rate to calculate the real return when we use our points to contribute to an RRSP and invest with the points.

With 60,000 reward points NBC, they can be exchanged for a $500 contribution to an RRSP account.

So with 60,000 points, you can actually get $633, which is better value than 60,000 points for $600 in travel credit!

The higher your income, the higher your marginal tax rate, and the higher your return.

Then, by injecting the $133 tax savings into a child’s RESP (Registered Education Savings Plan), you can take advantage of an additional grant of 30% or $39.90.

Your 60,000 rewards points can add up to $672.90 if you also contribute to an RESP!

Your new $500 RRSP contribution will start to grow depending on the product you choose.

For example, I bought $500 worth of Air Canada shares on February 9, 2021, and have had a 15.30% gain since purchase. My RRSP account shows $576.50 on February 9, 2022.

So, with 60,000 NBC reward points, I was able to obtain $749.40($500 contribution + $133 tax return + $76.50 return) in addition to the RESP grants.

We often hear that you shouldn’t contribute to an RRSP when your income is low. This is not entirely true. Of course, it’s best to maximize the TFSA before topping up the RRSP in these situations, but when buying a home, it may be worthwhile to turn to the RRSP.

Also, it is possible to defer the deduction of the RRSP contribution. You won’t get the tax refund right away, but you’ll be able to earn tax-sheltered returns right away.

The same applies to the FHSA which allows money to grow and be withdrawn without being taxed on the return.

For example, an 18-year-old student has saved $7,500 with their summer jobs since they were 15. They can maximize their TFSA to $7,000 and use the excess to contribute to their RRSPs, depending on their contribution room. Then they can wait until they return to work to maximize their tax refund.

The various institutions mentioned at the beginning of this article offer reward points as a welcome bonus. So it’s possible to earn points towards an RRSP contribution almost free of charge with these credit cards!

Following on from the examples illustrated in this article, let’s take a look at what National Bank is currently offering as a welcome bonus.

National Bank’s three flagship products earn NBC rewards points NBC. That means money contributed to an RRSP!

These cards also award between 1 and 5 points per dollar on all your purchases, depending on the card and purchase category. This can add up to a 5% return on your next RRSP contribution.

For students or individuals with modest incomes, it is possible to obtain these points with the National Bank Platinum Mastercard^®.

Then, for those who qualify for the National Bank World Elite Mastercard, you can enjoy a host of other benefits, such as access to the NBC lounge and up to $150 in travel credit.

In short, credit card reward points are extremely flexible. They allow us to save on everyday living, to travel better, to travel more and to get richer: for example, by investing in an RRSP or FHSA to get a tax refund.