In our working years, determining our personal tax burden can be quite simple – earn income and pay personal tax at the graduated rates. In our senior years, the formula is less straightforward. Though seniors pay tax at the same graduated personal tax rates as the rest of the population, senior-specific benefits, programs, and credits may be negatively impacted by their income. Programs vary, from nursing home and health care premium subsidies to Old Age Security payments. Further complicating matters, the type of earnings, such as employment income versus eligible dividends versus ineligible dividends have different impacts.
There are numerous other provincial/territorial credits and programs available to seniors which are often paid only if applied for, and commonly rely on personal income tax return filings to support eligibility.There are numerous other provincial/territorial credits and programs available to seniors which are often paid only if applied for, and commonly rely on personal income tax return filings to support eligibility. Many income-tested programs are available only to the lowest-income seniors, making an understanding of the impact of various types of income critical. Below we will discuss the types of income a senior may receive and planning considerations for managing the income. Also, we will consider tax credits and other programs commonly available to seniors.
Old Age Security (OAS) and Guaranteed Income Supplement (GIS)
OAS and GIS are monthly payments available to most Canadians aged 65 and greater. The age of eligibility will gradually increase to 67, commencing in April 2023, delaying access for those born after 1957. To qualify for the full pension, an individual must have 40 years of Canadian residency after age 18.
OAS and GIS payments vary depending on the recipient’s “net income” for tax purposes. The maximum GIS amount for the third quarter of 2015 for a single, divorced or widowed pensioner is $765.93. These amounts are eroded as the recipients earn income. GIS payments are eliminated quite early; for 2015, at approximately $17,000 for single persons and $22,000 for married couples. Generally, each additional dollar of income on this year’s tax return reduces next year’s GIS benefits by $0.50 – equivalent to an additional 50% tax on these earnings.
OAS payments are eroded at a higher level; in 2015, at $72,809 and fully eliminated at $117,954. Every extra dollar earned reduces the OAS benefit by $0.15, effectively a 15% tax.
Keep in mind that any amounts removed from a RRIF or RRSP will increase the individual’s “net income” thereby causing a potentially significant tax bill and eroding benefits. Seniors whose OAS would be fully clawed back may consider deferring the commencement of payments until age 70. This provides the benefit of higher future payments (0.6% per month of deferral, so 7.2% per year or 36% for the maximum five-year deferral).
In April 2013, the Government began automatically enrolling certain eligible seniors for OAS. While this assists many in receiving timely payments, those who wish to defer should be diligent to avoid automatic enrolment. Individuals must still apply and file tax returns, to receive GIS, if eligible. Therefore, even low-income seniors who are not taxable should file tax returns and apply for GIS. Other payments, such as the GST/HST credit, depend on filing tax returns.
Canada Pension Plan (CPP)
The CPP provides taxable benefits to contributors who retire, become disabled or die. Unlike OAS and GIS, the CPP is based past contributions, regardless of current earnings.
Like GIS and OAS, the standard age to receive CPP is 65. Also like OAS, individuals can defer receiving CPP up to age 70. The increase in monthly payments for deferral are slightly larger for CPP; an increase of 0.7% per month (8.4% for each year, 42% for the full five-year deferral). Alternatively, individuals can choose to receive a reduced CPP payment as early as age 60. From 2012 to 2016 the early pension reduction is being gradually increased. By 2016, an individual who starts receiving their pension at 60 will receive 36% (0.6% x 12 months x 5 years) less than if they had commenced the pension at age 65.
Many income-tested programs are available only to the lowest-income seniors, making an understanding of the impact of various types of income critical. For those working aged 60 to 65, contributions to the CPP (creating a post-retirement benefit (PRB) are mandatory. Individuals aged 65 and over can choose to stop contributing when receiving CPP payments. To do so, the individual should complete Form CPT30 and provide the original to CRA and a copy to their employer. Working individuals aged 65 to 70 should consider whether it is more beneficial to:
- stop contributing to CPP, which would require the individual to collect CPP payments (ie. the option to defer is unavailable); or,
- continue to make CPP contributions (leaving the options to collect or defer CPP payments).
Individuals aged 65 and greater who have already qualified for maximum CPP payments can enjoy an additional PRB on top of the regular CPP payment by continuing to contribute.
Tip: Service Canada’s calculator at http://www.servicecanada.gc.ca/eng/services/pensions/cric.shtml provides retirement income information on OAS and CPP.
Earlier, we noted that benefits were reduced based on a tax concept called “net income”. Different types of investment income increase “net income” at different rates. For example, a $100 eligible dividend received in 2016 is grossed-up to “net income” of $138. A dividend tax credit mitigates the tax, however, the net income is still $138. Contrast that to a $100 non-eligible dividend or $100 of interest income, which for 2016 “net income” purposes are $117 and $100 respectively. Care should be given to understanding the consequences of dividends on income-tested benefits.
Tip: Consider earning investment income in a Tax Free Savings Account such that income earned will not erode income-sensitive benefits such as OAS and GIS.
Registered Retirement Savings Plan (RRSP) & Registered Retirement Income Funds (RRIF)
Withdrawals from both RRSPs and RRIFs are taxable to the recipient and may impact the above noted income-tested benefits. However, income on growth within the plan is deferred and not taxed until withdrawal.
While individuals are not required to withdraw amounts from an RRSP, except possibly at age 71, they are required to withdraw a certain amount from their RRIF based upon their age. For 2015 and subsequent years the minimum RRIF withdrawal has been reduced.
At age 71, individual holders of an RRSP must:
- withdraw the funds;
- transfer them to a RRIF; or,
- use them to purchase an annuity.
Tip: Consider earning investment income in a Tax Free Savings Account such that income earned will not erode income sensitive benefits such as OAS and GIS.Keep in mind that any amounts removed from a RRIF or RRSP will increase the individual’s “net income”, thereby causing a potentially significant tax bill and eroding benefits. The impacts can be very large if an individual chooses the default option to withdraw all funds at age 71.
Tax Credits and Programs
In addition to managing the cash inflows and the impact on benefits, seniors should also ensure they are fully accessing tax credits available to them. Some common non-refundable tax credits they may benefit from include:
- Medical Expense Tax Credit – A tax credit based on the cost of certain medical expenses, such as prescription medicine:
- Disability Tax Credit – A tax credit for individuals with a severe or prolonged impairment in physical or mental function. This credit can be transferred between spouses or common-law partners;
- Age Amount – A tax credit for individuals 65 years and older. This credit, which is transferrable to a spouse or common-law partner is income-sensitive, fully eroding at $82,353 (for 2015);
- Pension Amount – A tax credit for those with an eligible pension, superannuation, or annuity payment, which can be transferred to a spouse or common-law partner;
- Public Transit Amount – A tax credit based on the cost of certain public transit passes; and
- Home Accessibility Tax (HAT) Credit – New for 2016 and later tax years, the HAT credit will provide a maximum $1,500 tax credit to seniors (65 years or older at the end of the tax year) or certain related persons who spend up to $10,000 on eligible renovation expenses per year. These renovations must be of an enduring nature which allow a senior (or an individual eligible for the disability tax credit) to be more mobile, safe and functional within their home.
…even low income seniors who are not taxable should file tax returns and apply for GIS. Other payments, such as the GST/HST credit, depend on filing tax returns. In addition to claiming tax credits, individuals receiving certain pension income (such as life annuity payments, RRIF payments and RRSP annuity payments) may consider splitting, or shifting their pension income from the higher income to the lower income spouse. Though there will be a tax benefit from shifting income from a higher to a lower tax bracket, consideration should also be given to other income-tested benefits such as OAS which may be impacted by this shifting of income.
There are numerous other provincial/territorial credits and programs available to seniors which are often paid only if applied for, and commonly rely on personal income tax return filings to support eligibility. For example, the Alberta Seniors Benefit (detailed at http://www.seniors.alberta.ca/seniors/seniors-benefit-program.html) provides cash payments to seniors with income under $26,400 ($43,000 combined income for couples).
The numerous pensions, benefits, tax credits and other programs available to seniors can be generous, and the income can create significant consequences. Eligibility for certain programs outside the tax regime (e.g. nursing home subsidies, provincial health subsidies) depends on tax returns. Failing to file, even if not required, may impede access to these programs and benefits, even where income levels do not impact them.
Managing cash flow and preserving retirement capital can be counter-intuitive and confusing.
Seniors must be especially careful to consider the costs related to their income, and the critical importance of filing a tax return.
Caitlin L. Butler, CPA, CA is a designated accountant splitting her time between Vancouver, British Columbia and Edmonton, Alberta. She is a member of the Video Tax News editorial board and is a co-writer and presenter of the Video Tax News National Personal Tax and Corporate Tax update courses.
Joseph R. Devaney, CPA, CA has worked in both small and large public accounting firms in Alberta and Ontario. He currently is a member of the Video Tax News editorial board and is a co-writer and presenter of the Video Tax News National Personal Tax and Corporate Tax update courses.