Articles

Below you will find a real life case study of a couple who are looking for financial advice on how best to arrange their financial affairs. Their names and details have been changed to protect their identity. The Globe and Mail often seeks the advice of our VP, Wealth Advisor, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.

Written by: Dianne Maley
Special to The Globe and Mail
Published May 24, 2019

François and Jacquie are wondering if they’re on track to retire at the age of 60 and still live comfortably. He is 54, she is 53. They have two children, ages 17 and 19.

François earns $105,000 a year before tax, while Jacquie earns $230,000. They both have defined contribution pension plans to which their employers contribute.

In the meantime, they want to pay off the home equity line of credit (HELOC) taken out to expand their Toronto bungalow. Their next project will be to landscape their yard. Their retirement spending goal is $70,000 a year after tax.

A key goal is to maintain the Muskoka-area cottage François and his sister inherited and pass it on to their children in turn. The cottage is self-sustaining, with rental income covering expenses, François writes in an e-mail. They also want to travel.

We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Jacquie and François’ situation.

What the expert says

First, Mr. Ardrey looks at cash flow. Although their spending is taking up much of their income today, that will not be the case once their daughters have graduated from university, he notes. All postsecondary spending is anticipated to end by 2024.

François and Jacquie are aggressively paying down their HELOC – making regular monthly payments plus annual lump-sum ones – and plan to have it paid in full by mid-2020. When that is done, they will landscape their house for $30,000 and buy a new car for $60,000. “After that point, we assume excess cash flow will be saved toward their retirement.”

The surplus funds will go first to catch up with their tax-free savings account contributions. They will be caught up by 2022, after which they will contribute the maximum each year. The remaining surplus will go to a non-registered investment account.

François is saving $100 a month to his TFSA and Jacquie $300 to hers. François is also saving $917 a month to his RRSP and $533 to his defined contribution pension plan (DCPP), which is matched by his employer. Jacquie is saving $1,600 a month to her DCPP, with her employer contributing $610 a month. They also have $210 going to a registered education savings plan.

Jacquie and François plan to downsize their home when he is 70 and move into a condo that is half the value of their current home. They plan to begin taking Canada Pension Plan and Old Age Security benefits at 65.

Next, their investments. Based on the underlying asset mix (60-per-cent globally diversified equities and 40-per-cent Canadian and global bonds), they have a historical rate of return of 4.88 per cent. Their non-DCPP investments are invested primarily in “F”-class mutual funds with wrap account fees. The total fee is 1.99 per cent. (F-class funds have lower management expense ratios because they do not pay trailer fees to the adviser.) The planner assumes their pension assets will have the same asset mix when they retire. He uses an inflation rate of 2 per cent, retirement spending of $70,000 a year, including $10,000 a year for travel, and that both of them live to the age of 90.

“Based on these assumptions, they will have more than enough wealth to carry them through retirement,” Mr. Ardrey says. At Jacquie’s age 90, they will have an estate of $8.7-million, of which $4-million is in investments and $4.7-million is in real estate and personal effects. If they chose to spend the $4-million of investment assets, they could increase their spending by $4,000 a month or $48,000 a year.

“That being said, there is a significant tax liability remaining on the cottage when passing it to their two daughters,” Mr. Ardrey says. If the cottage rises in value along with inflation, there would be a $2-million capital gain on François’s half when he dies.

To effectively prepay the tax for their children, François could consider buying some permanent life insurance. The funds from the policy could be used to pay the taxes owing on the cottage and make it less likely the beneficiaries would need to sell it to pay the tax.

Depending on François’s health, this could be expensive, Mr. Ardrey says. But it would give François and Jacquie the freedom to spending their savings without worrying whether there will be enough left in their estate to pay the capital-gains tax.

By the time François and Jacquie retire in a few years, they will have about $2-million in investments. “Paying 2 per cent in investment costs and using mutual funds to execute their strategy is not the best plan,” Mr. Ardrey says.

Instead, they should consider hiring an investment counsellor to develop a well-rounded and lower-cost portfolio of large-cap stocks with strong dividends as well as corporate and government bonds. Investment counselling firms have a fiduciary duty – like a trustee – to act in the best interests of their clients.

If Jacquie and François wanted to diversity the bond portion of their portfolio to boost their returns, they could look into fixed-income securities not available to the average investor, Mr. Ardrey says. Like government bonds, these fixed-income alternatives tend to have little correlation to the stock market. “We would recommend carefully vetted private debt and income funds with solid track records.”

Client situation

The person: François, 54, Jacquie 53, and their children, 17 and 19

The problem: Can they retire at 60 with $70,000 after tax? Can they afford to keep the cottage in the family?

The plan: Retire as planned with a comfortable cushion. Consider taking out permanent insurance to help offset capital-gains tax that will be payable on François’s share of the family cottage when he dies. Review investment portfolio to lower costs and perhaps boost returns.

The payoff: Financial security with the option of spending more than planned.

Monthly net income: $17,100

Assets: His TFSA $6,000; her TFSA $15,000; his RRSP $351,000; her RRSP $227,000; market value of his DCPP $91,000; market value of her DCPP $350,000; RESP $77,000; residence $1.95-million; share of cottage $1.5-million. Total: $4.56-million

Monthly outlays: HELOC $3,480; property tax $760; property insurance $300; utilities $385; maintenance $100; transportation (insurance, fuel, maintenance for two cars) $930; grocery store $900; clothing $50; university expenses $800; additional HELOC (annual lump-sum payment divided by 12) $2,700; gifts, charity $220; vacation, travel $1,000; other discretionary $100; dining, drinks, entertainment $885; personal care $250; pets $100; dentists $50; life insurance $76; TV, internet $180; his RRSP $917; RESP $210; TFSAs $400; pension plan contributions $2,133. Total: $16,926

Liabilities: Line of credit $120,000

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

Presented By:
Matthew Ardrey
VP, Wealth Advisor
matt@tridelta.ca
(416) 733-3292 x230

Below you will find a real life case study of an individual who is looking for financial advice on how best to arrange their financial affairs. Their name and details have been changed to protect their identity. The Globe and Mail often seeks the advice of our VP, Wealth Advisor, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.

Written by: Dianne Maley
Special to The Globe and Mail
Published April 26, 2019

After a long and successful career, Ellen has retired from consulting and is winding down her corporation. She is 72, single and well off.

Still, she has concerns. She has roughly $1.8-million in savings and investments, the lion’s share of which is in stocks. She does her own investing, choosing stocks that pay steady and rising dividends with good management and solid earnings.

“I understand the risk is high,” Ellen writes in an e-mail. “If a recession like the one in 2008 hits, it will greatly reduce the asset value,” she adds. “Any advice on the portfolio and risk management would be much appreciated.”

Ellen is healthy and active and aims to do her best to stay that way so she can continue to travel extensively. Yet aging will impose constrains on travel, Ellen acknowledges, so she’ll likely be spending less on travel over time. “Other emerging issues,” such as health care, will increase the demands on her savings in her later years.

She is concerned about having enough money to “live in a first-rate senior residence and eventually a first-rate nursing home if necessary,” Ellen writes. Her retirement spending target is $65,000 a year after tax, although her actual spending is lower.

We asked Matthew Ardrey, vice-president of TriDelta Financial in Toronto, an investment counselling firm, to look at Ellen’s situation.

What the expert says

First, Mr. Ardrey looks at Ellen’s income. She plans to wind the corporate account down over 10 years to minimize the taxes owing on the withdrawals. To do this, she will need to withdraw about $38,500 a year, which will be taken as taxable dividends. She had been drawing a bit less than $10,000, so this will increase her income.

Ellen gets $7,121 in Old Age Securities benefits and $7,872 in Canada Pension Plan benefits, numbers that will rise in line with inflation. She also makes mandatory minimum withdrawals from her registered retirement income fund (RRIF) and receives dividends from the stocks in her taxable investment accounts.

Ellen’s lifestyle spending is $40,500 a year, plus $10,000 a year for travel. Her only savings is the maximum annual contribution to her tax-free savings account (TFSA).

Looking ahead, Ellen figures she’ll sell her Toronto condo when she is 80 or so and move into a high-end retirement residence that will allow her to transition onsite to a nursing home if need be, Mr. Ardrey says. In drawing up his forecast, he assumes she sells the condo for $589,000 at the age of 80, minus 10 per cent for selling costs, and the balance is added to her investment portfolio. Her living costs rise from about $50,000 to $72,000 a year in current-year dollars.

Now for her portfolio. A full 97 per cent of Ellen’s investment assets are in stocks. If she leaves it as is, she could earn 6.4 per cent a year on average, the planner estimates. He assumes an inflation rate of 2 per cent a year.

“Based on these factors, Ellen will have more than enough to retire,” Mr. Ardrey writes. “In fact, she has a substantial financial cushion.” To illustrate, if she keeps her spending roughly the same, she would leave an estate of $3.4-million at the age of 90, he says. If she wanted to spend it all, she could increase her spending by a whopping $90,000 a year, more than double what she is spending now. That would mean an increase in her current spending from $50,000 to $140,000, and her spending after she moves into a retirement home from $72,000 to $162,000.

Still, the plan as it stands has considerable risk, Mr. Ardrey says. Of the 97 per cent in stocks, Ellen has 6 per cent in one U.S. holding. The remaining 93 per cent is in Canadian stocks. Seventy per cent of her holdings is invested in just four stocks.

If the stock market dropped in the near future the way it did in 2008-09, “it could have a substantial impact on her portfolio and her retirement plans,” Mr. Ardrey says. The main Toronto stock index lost 35 per cent of its value in 2008 and did not return to its former high until 2014, he notes.

To help manage risk, the planner suggests a portfolio that is diversified geographically and by sectors. He also recommends asset class diversification by adding both fixed-income (bonds) and alternative income investments that are carefully vetted by an investment counsel firm for sale to its clients.

“The ones we would recommend for Ellen are more on the conservative side, focusing on income-generation strategies through private debt, accounts receivable factoring and global real estate,” Mr. Ardrey says. “These strategies have been shown to add value to portfolios by increasing returns over traditional fixed income while having little to no correlation to stock markets.”

If Ellen shifts to a portfolio of 50-per-cent stocks, 20-per-cent fixed income and 30-per-cent alternative income, she could expect a rate of return of about 6.5 per cent a year, the planner says. “She would be earning that return with substantially less risk.” She would have investment costs of about 1.25 per cent, 60 per cent of which would be tax-deductible in her non-registered and corporate accounts, he says.

She’d leave an estate of $2.7-million, or if she wanted to spend it all, she could increase her spending by $81,000 a year. That would mean an increase in her current spending to $131,000 a year, and her spending after she moves into a retirement home to $153,000.

“Ellen is in excellent shape to enjoy her retirement,” Mr. Ardrey says. “In fact, I would encourage her to enjoy it more!”

Client situation

The person: Ellen, 72

The problem: How to reduce the risk in her overly concentrated portfolio.

The plan: Diversify by country, industry and asset class. Cut stock holdings and add fixed-income and alternative income securities.

The payoff: Greater peace of mind.

Monthly net income: $6,655

Assets: Cash and short-term $16,180; taxable investment accounts $679,506; corporate account $310,579; TFSA $98,426; RRIF $680,627; condo $505,000. Total: $2.29-million

Monthly outlays: Property tax $240; home insurance $30; utilities $70; condo fee $645; handyman $40; transportation $490; groceries $250; clothing $430; gifts, charity $90; vacation, travel $800; personal care $300; dining, drinks, entertainment $285; subscriptions $31; study courses $100; health care $190; phones, internet, TV $179; TFSA $500. Total: $4,670. Surplus of $1,985 goes to travel, spending that might be underestimated and investment account.

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

Presented By:
Matthew Ardrey
VP, Wealth Advisor
matt@tridelta.ca
(416) 733-3292 x230

Below you will find a real life case study of a couple who are looking for financial advice on how best to arrange their financial affairs. Their names and details have been changed to protect their identities. The Globe and Mail often seeks the advice of our VP, Wealth Advisor, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.

Written by: Dianne Maley
Special to The Globe and Mail
Published March 29, 2019

“Will we have to sell our house to finance our retirement years?” Tom and Tilly ask in an e-mail.

It’s a question that comes up frequently from people nearing that age when they plan to leave the workforce for good. Tom is 59, Tilly 60.

They’ve had conflicting advice from their current and former financial advisers. Their former adviser said they’ll have to sell their Hamilton-area home in 10 years. The new one says that won’t be necessary.

Tom earns about $137,000 a year working for a non-profit. Tilly has gone back to school to satisfy her love of learning and potentially give her part-time income later on. Her tuition is covered by a scholarship.

They wonder whether Tom can afford to hang up his hat in three years or so. He has a group registered retirement savings plan to which he and his employer both contribute. Tilly has a defined-benefit pension plan from a previous employer that will pay $12,090 a year starting at age 65, indexed to inflation.

Their retirement spending target is $75,000 a year after tax, about $15,000 of which is for travel. Before then, they need to fix up their house a bit and replace one of their cars.

“Are we on track?” they wonder.

We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Tom and Tilly’s situation.

What the expert says

Tom is saving $1,100 a month to a group RRSP, to which his employer contributes $630 a month, Mr. Ardrey says. They are each saving $700 a month to their tax-free savings accounts. Mr. Ardrey assumes they continue saving this amount until Tom retires, after which the RRSP savings cease and the TFSA contributions fall to $500 a month each.

They have a cash-flow surplus of about $1,400 a month, which they are saving to pay for $25,000 of home renovations and to replace a car for another $25,000.

The planner assumes they begin collecting Canada Pension Plan and Old Age Security benefits at age 65, about 70 per cent of maximum CPP for Tilly and 90 per cent for Tom. He recommends they apply to share their CPP to help lower their taxes. At age 65, Tilly will begin collecting her pension.

Because parents of both Tom and Tilly lived well into their 90s, Mr. Ardrey assumes they will both live to age 95.

Looking at their investments, their asset mix has a historical rate of return of 4.4 per cent, with an average management expense ratio of 1.3 per cent, for a net return of 3.1 per cent.

“Based on these assumptions, Tom and Tilly can meet their retirement spending goals but with minimal financial cushion,” Mr. Ardrey says. That assumes Tom, who turns 60 later this year, retires at age 63. If they spend all of their investment assets, leaving only real estate and personal effects, they will have a cushion of only $2,400 a year.

“This is right on the line of success or failure,” the planner cautions. “Any one large, unexpected expense could have a significant impact on their retirement plan.”

If they sold their house, now valued at about $675,000, and downsized to a $400,000 condo at Tom’s age 85, “they would greatly increase their financial flexibility,” Mr. Ardrey says. This would give them a financial cushion of $9,000 a year. It would also give them the option of retiring earlier than planned.

An alternative would be to try to improve their investment returns. They are investing mainly through mutual funds. Given the size of their portfolio, they could benefit from using the services of an investment counsellor – particularly one who offers alternative income strategies as part of their overall asset mix, Mr. Ardrey says.

Although investment returns are not guaranteed, alternatives to stocks and bonds – funds that specialize in such things as private debt, global real estate and accounts receivable factoring – could potentially enhance returns on the fixed-income side of their portfolio while having little or no correlation to stock markets, Mr. Ardrey says. “They represent a unique diversifier.”

Their current asset mix is 40-per-cent fixed income, 20-per-cent Canadian, 15-per-cent U.S. and 25-per-cent international stock funds. He recommends 25-per-cent fixed income, 25-per-cent alternative income and 50-per-cent globally diversified stock funds. “With this new asset mix in place, we would expect a return of 6.5 per cent and investment costs of 1.5 per cent, for a net return of 5 per cent a year.”

If Tom and Tilly achieved this rate of return and downsized their house when Tom is 85, they could have a substantial cushion, the planner says: $19,200 a year. If they wanted to, they could retire when Tom turns 61 in 2020 and still have a cushion of $9,000 a year.

Client situation

The people: Tom, 59, and Tilly, 60

The problem: Will they have to sell their house to finance their retirement?

The plan: Try to improve investment returns, but keep an open mind to selling the house and downsizing in 25 years or so.

The payoff: Retiring as planned with a comfortable financial cushion.

Monthly net income: $8,455

Assets: Cash in bank $60,000; his personal and group RRSPs $395,000; her RRSP $245,500; his TFSA $44,500; her TFSA $37,000; estimated present value of her DB pension plan $187,250; residence $675,000. Total: $1.6-million

Monthly outlays: Property tax $460; home insurance $90; utilities $285; maintenance, garden $75; transportation $580; groceries $650; clothing $205; gifts, charity $250; vacation, travel $700; other discretionary $50; dining, drinks, entertainment $600; personal care $100; subscriptions $30; dentists, drugstore $20; life insurance $185; phones, TV, internet $270; his group RRSP $1,100; TFSAs $1,400. Total: $7,050Surplus $1,405

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

Presented By:
Matthew Ardrey
VP, Wealth Advisor
matt@tridelta.ca
(416) 733-3292 x230

Below you will find a real life case study of a couple who are looking for financial advice on how best to arrange their financial affairs. Their names and details have been changed to protect their identities. The Globe and Mail often seeks the advice of our VP, Wealth Advisor, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.

Written by: CHRISTINNE MUSCHI
Special to The Globe and Mail
Published March 8, 2019

To buy or not to buy, that is the question for Ron and Rosemary, a couple living and renting in the Montreal area.

Ron is 43 and works as a project manager, Rosemary is 35 and works for a non-profit. Together they bring in about $190,000 a year. They’re considering a condo rather than a house because it would require less upkeep. They have no plans to have children.

Their question: Which is better, buying a condo in the $600,000 range “or continuing to rent throughout our lives?” Rosemary asks in an e-mail. “If we continue to rent, we would definitely be looking at renting a unit in a newer building with all of the amenities we want, possibly pushing the rental price per month to $2,500 or higher,” she adds.

Longer term, they are concerned about saving for retirement. Their postwork spending goal is $100,000 a year after tax, rising with inflation.

We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Rosemary and Ron’s situation.

What the expert says

First, Mr. Ardrey looks at a scenario in which they continue to rent. They would move to a building with better amenities, increasing their rent by $500 a month to $2,500 a month, he notes. All other expenses would remain the same. The planner’s assumptions are based on a life expectancy of 90 for both.

Ron is contributing $645 or 8 per cent of his salary to a defined contribution pension plan with a 6-per-cent company match. Rosemary is contributing $475 a month to an RRSP with a $475-a-month match from her employer. They are stashing away another $1,000 a month in a bank account.

If they decide not to buy, the planner assumes they would transfer the $39,900 they have in their bank account to their tax-free savings accounts. Their budget allows for additional TFSA contributions of $500 a month each, money that is now going toward a down payment.

Ron plans to retire at 65 and Rosemary at 70. When they do, they will receive Canada Pension Plan and Old Age Security benefits. Because Ron is an immigrant to Canada, the plan assumes he will get 80 per cent of maximum CPP and OAS. Rosemary will receive 100 per cent. In addition, her monthly CPP benefit will be 42-per-cent higher than if she had started receiving it at 65.

Mr. Ardrey looks at the couple’s investments. Based on their current portfolio structure, they have a historical average rate of return of 4.4 per cent. The average investment cost of their portfolio, excluding Ron’s DC pension plan, is 1.7 per cent, leaving them a net return of 2.7 per cent. After inflation, forecast to be 2 per cent, their real rate of return is 0.7 per cent.

In retirement, Rosemary and Ron want to spend $100,000 a year. “Based on the assumptions above, they fall slightly short of their goals, running out of funds near the end of Rosemary’s life,” Mr. Ardrey says. If they cut their spending a bit, they could reach their goal, but they would have “zero financial cushion.”

Now he looks at a scenario in which they buy a condo for $600,000. They have almost $40,000 saved, so they will need a mortgage for $560,000 at an estimated 3.5 per cent, amortized over 25 years. Their payments would be about $2,570 a month.

Offsetting the mortgage expense is the fact they would no longer be paying rent. Living expenses in retirement would be $76,000 a year after the mortgage is paid off, substantially less than if they were still paying rent. Any budget surplus is assumed to be saved to the TFSAs each year.

“Based on these assumptions, Rosemary and Ron can reach their retirement goal,” Mr. Ardrey says. Not having to pay rent when they retire “is a major factor,” he notes. This cost reduction more than offsets the reduction in savings.

If they decided to spend all of their investment assets, leaving only their real estate and personal effects, they could increase their spending by $1,000 a month, inflation adjusted, the planner says.

“So of the two scenarios, the decision to purchase the condo is the financially preferred one,” he concludes. “In addition to the cash flow numbers being stronger, Rosemary and Ron would also have a real estate asset that in an emergency they could borrow against or sell if need be.”

Finally, Ron and Rosemary should review their investment strategy to improve their investment returns and lower their costs, Mr. Ardrey says. Their current asset mix is about 90-per-cent stocks and stock funds, and 10-per-cent cash and fixed income.

Instead, he recommends 65 per cent stocks and stock funds, 25 per cent alternative income investments and 10 per cent fixed income. Alternative income funds – which can be bought through an investment counselling firm – include strategies such as private debt, global real estate and accounts receivable factoring. “This would broaden their diversification into an asset class that has historical returns of 7 to 9 per cent a year and little to no correlation to equity markets,” the planner says.

Making this change could increase their returns to 6.5 per cent and reduce investment costs to 1.5 per cent.

The difference would be material. “If they remain renters, then they go from falling just short to being able to increase their retirement spending by $18,000 per year,” the planner says. In the condo scenario, the potential for extra spending would be even greater.

Client situation

The people: Ron, 43, and Rosemary, 35

The problem: Should they rent or buy?

The plan: Go ahead and buy the condo, but review investments to diversify their holdings, potentially improve returns and lower investment costs.

The payoff: Retirement goals met with a financial cushion besides.

Monthly net income: $10,800

Assets: Cash $39,900; her TFSA $5,470; his TFSA $5,300; her RRSP $88,030; his RRSP $79,030; market value of his defined contribution pension plan $10,000. Total: $227,730

Monthly outlays: Rent $2,000; tenant insurance $25; utilities $180; furnishings, decorating, maintenance $350; transportation $605; grocery store $900; clothing $320; gifts, charity $1,000, vacation, travel $1,000; dining, drinks, entertaining $900; personal care $350; pets $115; sports, hobbies $490; dentists $50; drugstore $10; phones, TV, internet $340; his DC pension plan $645; her RRSP $475. Total: $9,755 Surplus goes to saving.

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

Presented By:
Matthew Ardrey
VP, Wealth Advisor
matt@tridelta.ca
(416) 733-3292 x230

When people think of retirement, they make think of relaxing at the cottage, traveling the world, or maybe with the recent blasts of winter we have been receiving, spending some time in warmer climates. What most people don’t think about is how my taxes are going to change. Yes, with April just around the corner, it is time to think about taxes and how they will affect you in retirement could be the difference from lying on a beach in February and shoveling your driveway for the fifth time this week.

If like many Canadians, you are a couple where both spouses work, the opportunities to split income are few and far between. In retirement that changes for the better. A number of years ago the government introduced legislation that allows pension income to be split between spouses. If you are already the lucky recipient of income from a defined benefit (DB) pension plan, you can further benefit by splitting up to 50% of this income with your spouse. The obvious benefit to this is the lower income spouse would pay less tax on the pension income than the higher income spouse.  Also, he/she would now receive the pension credit, which is a non-refundable federal tax credit that maxes out at $2,000. So depending on the disparity of the tax rates between spouses and size of the pension, this could be a material benefit to their tax returns saving thousands of dollars a year in taxes.

Ok, that is great for those Canadians who have a pension, but what about the rest of us?

Once a taxpayer is over the age of 65, they can split life annuity, RRIF and LIF income in the same manner as DB pension income. This can lead to some interesting tax planning for someone who is doing a RRSP meltdown strategy. If one spouse has a much larger RRSP/RRIF than the other, they can double the meltdown amount by taking it from a RRIF instead of a RRSP after the age of 65. In doing this, the RRSP (or RRIF in this case) meltdown strategy could be extended to age 70, with CPP and OAS deferrals.

Other benefits to income splitting include being able to claim the age amount tax credit and possibly reducing or eliminating OAS clawback.

The mechanism for doing this in your taxes is relatively straightforward and does not have to be implemented until you file your taxes the following April. There is a form T1032 in your tax return where you make the pension election. Most tax software these days will do the calculation for you. Once all of your other information is entered for you and your spouse, the software will optimize the pension splitting between spouses. Even if you both have a pension, it can do this for you.

The topic of income splitting continues with your government pensions. Though OAS is not eligible to be shared, the CPP is. You and your spouse can apply to share your CPPs. You both have to be contributors at some point in your lives and both be receiving the pension. The amount eligible to share is based on your joint contributory period, which is just a fancy way of saying the time you were married or cohabitating. The benefit increases with the difference between CPP payment amounts.

While we are on the topic of CPP, I thought it was important to mention the child rearing drop out provision. Unlike the general drop out provision, which is calculated automatically, the child rearing must be applied for.

How does it work?

Let’s take you back to grade school where we learned about fractions. The CPP you receive is a fraction of the maximum payable, ignoring any early penalties or deferring benefits. The total number of years is 47 (age 18-65). The general drop out provision eliminates the lowest eight, making the denominator 39. Any year you make the maximum contribution you get a 1 in the numerator and if not, then a number between 0 to less than 1.

The child rearing drop out provision allows a spouse who may have stopped or reduced their work due to child care, to eliminate up to seven years per child (no double counting years if you have children close in age). The benefit is any year that has less than a 1 in the numerator that is eliminated, will increase the overall CPP payable to you.

Another tax surprise for many retirees is tax installments. If you were self-employed, you will be familiar with these, but many salaried employees are not. Tax installments are requested by CRA once your taxes payable less your taxes deducted at source exceed $3,000. While working, your employer took taxes at source. In addition, you probably had RRSP deductions and other things that reduced your taxes or generated you a refund. Now with RRIF payments, CPP, OAS and other incomes, you may end up owing taxes.

CRA wants to get its taxes earlier rather than waiting until April. So it will request them of you in four quarterly installments over the year. This is CRA’s estimate of what you will owe this year based on previous years’ filings. You can choose to pay what they request or not if you feel your situation is different this year. But be warned, if you underpay your taxes you will be charged installment interest. If you overpay them, CRA does not pay you any interest on the overpayment. Nice work if you can get it!

After all this talk of taxes, maybe all you do want to do is lie on a beach or somewhere warm.

When you do, if you are like many Canadians, you will head to our neighbours to the south. However, before you do, consider some of the tax implications of doing so.

If you fall in love with the warm weather, you may be tempted to purchase a vacation home in the U.S. In doing so, you have opened yourself up to U.S. Estate Tax exposure. By owning U.S. real property, you are considered to have U.S. situs property, which falls under the U.S. estate tax laws. The likelihood that you will end up paying any estate tax these days is low because of the increase threshold limits, but consult someone familiar with the rules before making a purchase.

Another exposure with spending time in the U.S., is actually the time you spend in the U.S. The U.S. has a substantial presence test where they could deem you a resident for U.S. tax purposes if the calculation shows you spent over 182 days there in the past three years.

Consider the calculation for someone who spends 4 months (120 days) in the U.S. per year.

Current Year each day counts as 1 = 120 X 1 = 120
Previous Year each day counts as 1/3 = 120 X 1/3 = 40
Second Previous Year each day counts as 1/6 = 120 X 1/6 = 20

Thus, by spending four months in the U.S., this person’s substantial presence test calculation is at 180 days, very close to the threshold.

In cases, where you plan to spend a significant amount of time in the U.S. each year, you should file a U.S. form 8840, Closer Connection Form. This form establishes that even though you spend a substantial amount of time in the U.S., your connection to and therefore tax filing obligation is to Canada.

So thought the pressures of work may be days gone by, the tax complexity often ramps up in retirement. Make sure you are set up to optimize your tax situation in retirement, as proper planning can allow you to have your fun in the sun instead of being left out in the cold.

Written By:
Matthew Ardrey
VP, Wealth Advisor
matt@tridelta.ca
(416) 733-3292 x230