The government obviously loves seniors, as they receive benefits from a variety of tax assisted benefits and tax credits not available to others. However, these benefits are income-tested, in that there may be claw-backs on Old Age Security (OAS) payments and the Age Credit.
OAS is a monthly benefit available to most Canadians age 65 or older. However, you will be required to repay 15 per cent of the amount by which your net income for tax purposes – including your OAS pension – exceeds $66,733. If your taxable income exceeds $108,152, you will lose your entire OAS benefit to the clawback.
Age Credit is a non-refundable tax credit available to Canadians age 65 or older. For 2010, the maximum amount that can be claimed as an Age Credit is $6,446, but this amount is reduced by 15 per cent of your net taxable income in excess of $32,506 and disappears completely once your taxable income reaches $75,479.
Steering clear and keeping more – strategies that work for you
The key to avoiding OAS and Age Credit clawbacks is to keep your taxable income to the absolute minimum required to meet your needs – using strategies like these:
Pension income splitting
You can allocate up to 50% of ‘eligible pension income’ – including payments from a Registered Pension Plan (RPP) at any age and Registered Retirement Income (RRIF) payments at/after age 65 – to your lower earning spouse, which usually reduces your family’s overall tax bill and clawbacks.
Other income-splitting strategies
You can gift or loan assets to your spouse for investment purposes, contribute to a spousal RRSP (if your spouse is under age 71), and/or change who pays for daily living expenses and who invests.
Withdraw the minimum for your RRIF
RRIF withdrawals are fully taxable, so consider withdrawing only the minimum each year. If you have a younger spouse, base your withdrawals on their age – this will produce a smaller minimum withdrawal.
Invest in TFSAs
Contributions to Tax-Free Savings Accounts generate tax-free investment income. As well, payments from a TFSA are not taxable, so do not result in clawbacks
Seek non-registered investments that offer preferential tax treatment
Only 50% of the capital gains generated by equity investments are taxable income, which may result in less of your income being subject to clawbacks. Another strategy to consider is tax-advantaged or switch funds, which allow you to buy and sell investments without paying any taxes on capital gains until you leave the fund structure. This allows you to defer tax payments to a year when your income is lower.
With the right strategies you can pay less tax, avoid clawbacks and preserve your wealth. But talk them over with your professional advisor to be sure you are following all of the often difficult tax rules and doing what’s best for you.
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact a financial advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant. Chris Cochrane – Consultant 800-933-3489 ext. 226