by Owen | Dec 12, 2022 | Budgeting, Financial Planning, Government Programs, Retirement Planning, Tax Planning
Most governments try to avoid raising tax rates. It’s an unpopular move. It creates headlines. It causes a sharp drop in popularity. So how do governments earn more tax revenue? They increase taxes in a sneaky way. Some provincial governments have done this in the past and a few are still doing it now.
You may not have seen these tax increases reported in the media, but next year you may notice your tax bill increase, especially if you live in certain provinces.
If you find yourself with a little less cash flow next year, this might be why.
Not all provinces do this. But some provinces are sneakily increase tax next year. Some have been doing this same thing for years.
Are you in a province that is increasing taxes? Find the details at the end of the post.
by Owen | Dec 5, 2022 | Financial Planning, Government Programs, Income, Investment Planning, Retirement Planning, Tax Planning
In the last post we highlighted how Canadian dividends receive special tax treatment which can lead to very low and even negative tax rates at some income levels. But before you go and shift your portfolio towards Canadian dividends it’s important to understand how Canadian dividends can either help or hurt your situation, especially in retirement.
Canadian dividends are taxed in a particular way which can lead to some unintended consequences, especially when government benefits are involved. While Canadian dividends can lead to lower tax rates, they can also lead to higher benefit clawbacks on GIS and OAS benefits.
If you can avoid these pitfalls then Canadian dividends, when used strategically, can allow you to withdraw from an RRSP and pay no additional tax.
In this blog post we’re going to look at three examples of how Canadian eligible dividends can both help and hurt in retirement.
by Owen | Nov 28, 2022 | Investment Planning, Retirement Planning, Tax Planning
Dividends from Canadian corporations receive some special tax treatment that can make them an attractive investment in non-registered accounts. This special treatment means that they can help lower your average tax rate, especially in retirement.
But this special tax treatment makes it a bit confusing to understand how dividends are taxed. To calculate tax on Canadian dividends there are things like “gross ups” and dividend tax credits to consider.
Despite the extra confusion caused by this special tax treatment it can be very attractive to invest in Canadian companies. For most people there is a significant tax advantage when receiving Canadian dividends. For example, in Ontario, a retiree in the lowest tax bracket will experience a negative tax rate on eligible dividends!
The way these eligible dividends are taxed can help offset other income from CPP, OAS, pensions and RRSP withdrawals. With a bit of tax planning this advantage could add thousands in after-tax income for a retiree.
In this post we’ll look at how dividends are taxed, the difference between eligible and non-eligible dividends, and we’ll look at an example of how eligible dividends can help lower taxes in retirement (all the way to zero!).
Lastly, we’ll also look at how the dividend gross up can also trigger OAS clawbacks for high income retirees. A surprising negative of the way dividends are taxed (although it’s still an attractive form of income).
by Owen | Oct 11, 2022 | Financial Planning, Government Programs, Income, Investment Planning, Retirement Planning, Tax Planning
GIS (Guaranteed Income Supplement) is thought of as a government benefit that is exclusively for very low-income retirees, but the truth is that almost 1 in 3 retirees receive GIS benefits. This is a benefit that is widely available to retirees who are both low- and moderate-income.
GIS is a generous benefit. At a maximum it will provide over $10,000 per year per household. But this is quickly reduced by GIS clawbacks of 50% to 75%. For every dollar of taxable net income (line 23600 on your tax return), GIS is reduced by 50% to 75%.
For example, if you take $1,000 from an RRSP/RRIF then this would reduce next years GIS benefit by $500 to $750!
The challenge with the Guaranteed Income Supplement is that retirement planning with GIS benefits is very counter intuitive. Strategies that help reduce GIS clawbacks are often the opposite of strategies that help reduce income tax for higher income retirees. This can sometimes result in low- and moderate-income retirees getting advice that is not suited to their situation.
If not corrected in time, this bad advice can decrease future GIS benefits by $10,000’s or more.
For example, a client we worked with recently was advised to put $150/month into their RRSP despite being on disability benefits. This advice would have caused extra GIS clawbacks of at least $4,500 in retirement. From $9,000 in RRSP contributions, only half would end up in their pocket after considering GIS clawbacks.
Thankfully there are a handful of strategies to help reduce the GIS clawbacks… but these strategies require foresight. It’s best to create this type of plan in your 50’s, well before GIS benefits begin. The second-best time is in your early 60’s, right before GIS benefits begin. And the third-best time is between 65 and 70, when GIS benefits have begun but there is still time to make changes and maximize benefits. After age 72 there is less that can be done to reduce GIS clawbacks so planning ahead will pay off.
This type of planning can easily add $10,000’s in GIS benefits over the course of a plan and help make retirement significantly easier.
One of the reasons I love these GIS strategies is because they are specifically designed for low- and moderate-income households. We often hear about high-net-worth families employing teams of lawyers, accountants, and wealth managers to help them maximize their personal wealth. These strategies help low- and moderate-income households maximize their retirement income and could quickly backfire if used by anyone else.
by Owen | Jun 27, 2022 | Financial Planning, Government Programs, Investment Planning, RESP/Kids Education, Saving Money, Tax Planning
If you currently have children, or if you’re planning to have children soon, or if you know someone with children, then this blog post could help you increase the Canada Child Benefit (CCB) by $1,000’s or even $10,000’s.
The Canada Child Benefit is a generous government benefit. It’s available to families with children aged 17 and under. This benefit is based on taxable income and can be maximized with some careful planning.
By using just two common accounts, the TFSA and the RRSP, we can maximize the Canada Child Benefit (CCB) and also minimize income tax.
The net result is $1,000’s or $10,000’s in additional Canada Child Benefit (CCB) and potentially $100,000+ in additional net worth over the course of a financial plan.
In this blog post we’re going to go through a specific example of how one family can boost their Canada Child Benefit by over $55,000, and when combined with income tax reductions, improve their overall net worth by $300,000+
by Owen | May 2, 2022 | Financial Planning, Government Programs, Retirement Planning, Tax Planning
Income splitting is often talked about in reference to high-income earners, but what about the average Canadian family? How does the average Canadian family split income and minimize tax? A spousal RRSP is one way for the average Canadian family to easily split income in retirement.
For high-income earners there are income splitting strategies like spousal loans or “income sprinkling”. Spousal loans are for families with lots of non-registered savings and a large difference in marginal tax rates between spouses. “Income sprinkling” can be used by families who own a corporation (although with the new TOSI rules has changed dramatically).
But what about your average Canadian household? Are there are income splitting options for them?
One very easy and accessible type of income splitting is a spousal RRSP. Unlike other income splitting strategies this one is very easy to set up, it doesn’t require a lawyer, and it’s easy to understand.
The big benefit of a spousal RRSP is that the average family can use it to “equalize” their registered assets before retirement. This allows for a more equal distribution of income in retirement and a lower overall tax bill for a household.
In addition to lower income tax it also opens up more opportunities to maximize government benefits in retirement.
But you might be wondering, isn’t it possible to split income after age 65 anyway, why would I need a spousal-RRSP?
While it’s true that after age 65 income splitting is much easier to do, it’s still a best practice to try to equalize registered assets before age 65. This allows for the maximum flexibility when creating a retirement drawdown strategy, especially when retiring early.
Equalizing registered assets can be extremely beneficial, especially before the age of 65 when there are fewer income splitting opportunities, for this reason we sometimes want to look at using a spousal RRSP to help split income in the future.
