Planning ahead can mean the difference between qualifying for the Guaranteed Income Supplement (GIS) or not; receiving your full Old Age Security (OAS) pension, or not. Planning “ahead” is the key word, because if you wait until you are age 65, it is too late to take all the steps possible to maximize these benefits. This article applies to everyone, from the time you consider your very first RRSP contribution.
Old Age Security is a retirement income benefit provided to all Canadians age 65 and older who meet a residency requirement, and is managed by the government and funded by taxpayers. It is an income-tested benefit. Recipients (age 65 and older) who have other taxable income below the threshold, qualify for the Guaranteed Income Supplement. The amount is prorated, depending on the amount of income. Those who have income above a threshold, may have some of their OAS “clawed back”, or withheld on a prorated basis. Therefore, to increase the chance of receiving the maximum of one or both OAS and GIS, some tax planning is required.
For example, a single senior with no taxable income, who qualified for OAS of $618 monthly, would also receive GIS of $923 monthly. The GIS is not taxable income, whereas OAS is taxable.
A second example is an individual receiving Canada Pension (CPP) in the amount of $1,000 monthly would receive OAS of $618 monthly plus GIS $280 monthly. If this same person was also receiving $562 of RRIF income, they would no longer qualify for the GIS.
This is where planning comes in. It might be possible to stop the RRIF payments until age 72 (when it is mandatory to start RRIF payments). Or it might be possible to deregister or “cash in” the RRIF over one or a few years, while in a low tax bracket, in order to later qualify for the GIS. This might mean paying tax a little earlier, but at a lower rate than what might apply in future.
The third option might be to never accumulate an RRSP/RRIF in the first place, and instead save for retirement using a Tax-Free Savings Account (TFSA) and open investments.
At the higher end of income, OAS “Clawback” starts if taxable income from all sources exceeds $79,000 (rounded) at the rate of 15% of the income over this amount. At total income of $128,000 (rounded) the OAS is completely “clawed back” or withheld. This is reassessed every year. To avoid “Clawback” of the OAS, choosing tax efficient investments, withdrawing funds from RRSP/RRIFs before age 65 or after age 71, or managing the timing of the withdrawals are some possibilities.
As with all tax concepts, every individual situation is different, so we advise you to consult a financial planner to review all possible tactics that could improve your access to government pensions, and reduce your income tax not only in the current year, but in all years. Making investment decisions without considering the tax consequences could end up being a costly mistake in the long run.
We hope you will find this information valuable and will increase your financial confidence. You can always find these articles on our website anytime at www.actionfinancialgroup.com.
Karin Rimnyak, Certified Financial Planner®
David Dryburgh, Certified Financial Planner®
Ian Barrie, Certified Financial Planner®
This information has been prepared by Karin Rimnyak who is an investment Advisor for iA Private Wealth. Opinions expressed in this email are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth. iA private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.