Question

In: Finance

1. Kate’s taxable income for 2015 was $72,500. She had a choice between investing $4,325 of...

1. Kate’s taxable income for 2015 was $72,500. She had a choice between

investing $4,325 of her income in RRSP or investing that same amount in a

plan that would give her a non-refundable federal tax credit of $750. Which

option should she choose? By how much is she better off in tax saving?

Expert Solution

Suppose Kate chooses the first option

Taxable income = 72500 - 4325 = $ 68,175.

Tax on income of $ 68175 = 9225 * 10 % + (37450 - 9225) * 15 % + (68175 - 37450) * 25 %

= 922.50 + 4233.75 + 7681.25

= $ 12837.50

Now let’s assume that she chooses the second option

Taxable income = $ 72500.

Tax on taxable income = [9225 * 10 % + (37450 - 9225) * 15 % + (72500 - 37450) * 25 %] - 750

= [922.50 + 4233.75 + 8762.50] - 750

= 13918.75 - 750

= $ 13168.75

If she chooses first option she will save tax of $ 331.25 (13168.75 - 12837.50)

Accordingly, Kate should invest her income in the RRSP (Retirement Registered Savings Plan) only.

So the conclusion is Kate should choose the option of investing her income in RRSP. Tax saving for Kate will be $ 331.25 (approx.).

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Hope that helps.

Feel free to comment if you need further assistance J

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