Seniors receive a variety of benefits and tax credits from the federal government that are not available to others, however some benefits are income-tested and can result in clawbacks. Old Age Security (OAS) payments and the Age Credit are two examples of benefits that can be clawed back without proper income planning.
OAS is a monthly benefit available to most Canadians age 65 or older. You will be required to repay 15 per cent of the amount by which your net income for 2017 – inclusive of your OAS benefit – exceeds $74,788. When your net income exceeds $121,071, your entire OAS benefit is clawed back. July 2017 to June 2018 payments are based on 2016 net income, while July 2018 to June 2019 payments will be based on 2017 net income.
Age Credit is a non-refundable tax credit available to Canadians age 65 or older at the end of the year. For 2017, the maximum amount you can claim for the Age Credit is $7,225. This amount is reduced by 15 per cent of your net income in excess of $36,430 and is reduced to $0 when your taxable income reaches $84,597. The value of the credit is calculated using the lowest federal tax rate of 15 per cent multiplied by the amount claimed.
You can avoid OAS and Age Credit clawbacks by keeping your net income to the absolute minimum required to meet your needs. Here are some strategies for doing just that:
Pension income splitting
You can allocate up to 50 per cent of “eligible pension income” – including payments from your Registered Pension Plan (RPP) (at any age) and Registered Retirement Income Fund (RRIF) (at/after age 65) to your lower earning spouse, which usually reduces your family’s overall tax bill and clawbacks.
Reduce the amount of income received as Canadian source dividends, since these amounts are “grossed up” for the purposes of determining net income (although there is a dividend tax credit which will reduce the amount of tax paid, it does not reduce the amount of net income).
Withdraw the minimum from your RRIF
Withdrawals from investments held within a RRIF 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
Investments held within Tax-Free Savings Accounts (TFSA) generate tax-free investment income. TFSA withdrawals are not taxable, so do not result in clawbacks.
Seek non-registered investments that offer preferential tax treatment
Only 50 per cent of realized capital gains are included in income, and equity investments often distribute less investment income than fixed income investments. Less net income results in less of your income-tested benefits being subject to clawbacks. You can avoid clawbacks, reduce your tax burden and preserve your wealth. But don’t run afoul of complex tax rules by using inappropriate strategies for your situation. Talk to your professional adviser first.
This column, written and published by Investors Group Financial Services Inc. and Investors Group Securities Inc. presents general information only and is not a solicitation to buy or sell any investments. Contact your own adviser for specific advice about your circumstances.