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Hear a recording of today’s (March 12th) TriDelta Investment Conference Call

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After markets closed today, TriDelta Financial did an investment conference call to outline what we were doing heading into

2020, what signs we are looking for today to reinvest some funds, and what we might be investing in.

You will hear from:
Ted Rechtshaffen, MBA, CIM, CFP, President and CEO
Cameron Winser, CFA, Senior VP, Head of Equities
Paul Simon, CFA, VP, Head of Fixed Income

 

 

We hope that the call will give you a little comfort during a very uncomfortable time.

If you have questions about your personal situation, please don’t hesitate to contact your Wealth Advisor.

 

Thank you,

TriDelta Financial

Markets are fearful and history tells us that means the time to buy is right now

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Knowing what to do in the middle of a highly stressful and uncertain time is very difficult for investors. You have experts on TV telling you to horde cash, while others say today is the best day to buy. They all believe what they are saying, and everyone is really left to guess.

At our firm there are two things that guide us at times like this:

1. Have the right asset mix for you, and stick with it. Market changes should not meaningfully change your asset mix. Your asset mix should change mostly when your personal situation changes. Things like retirement, major purchases, divorce, or significant health changes — all of these might be times for a change to your asset mix.

This work on the correct asset mix insulates those with the least tolerance for losses from some of the damage when things go bad. For those not so insulated, they are OK with it because they understand that this is the price to be paid to get the upside as well.

2. Use data to minimize emotional investing. Our Sr. VP, Equities, Cameron Winser reviewed similar pullbacks over the past 70 years. Since 1950 there have been eight periods on the U.S. S&P 500 when there has been a decline of at least 15% in a 30-day period. Picking the absolute bottom is a guess each time, but at the end of that 30-day period of declines, the immediate and mid-term future was almost always positive.

These are returns without dividends, so they underestimate the actual returns.

Even without dividends, we can see the following:

  • Next 20 trading days (roughly 1 month) — the average return was 9.0 per cent and 7 of 8 were positive.
  • Next 40 trading days (roughly 2 months) — the average return was 12.3 per cent and 8 of 8 were positive.
  • Next 60 trading days (roughly 3 months) — the average return was 10.6 per cent and 7 of 8 were positive.
  • Next 260 trading days (roughly 1 year) — the average return was 28.7 per cent and 7 of 8 were positive.
  • Next 720 trading days (roughly 3 years) — the average cumulative return was 50.1 per cent and 8 of 8 were positive.

We looked at the same scenario for Toronto stock markets. We found nine situations of 15+ per cent declines in a 30-day period. The findings were largely the same.

  • Next 20 trading days (roughly 1 month) — the average return was 6.7 per cent and 8 of 9 were positive.
  • Next 40 trading days (roughly 2 months) — the average return was 8.0 per cent and 8 of 9 were positive.
  • Next 60 trading days (roughly 3 months) — the average return was 8.5 per cent and 6 of 9 were positive.
  • Next 260 trading days (roughly 1 year) — the average return was 21.8 per cent and 8 of 9 were positive.
  • Next 720 trading days (roughly 3 years) — the average cumulative return was 47.9 per cent and 9 of 9 were positive.

Fearful markets are a buying opportunityThis data tells a very important and clear story. Big pullbacks represent good entry points. As I write this, the S&P 500 has crossed the 15 per cent line from peak to trough this month.

This tells us that based on a pretty long history, if you buy into the market after a 15 per cent drop, you may suffer further declines over the next few days, but as you look further out, you will very likely be pleased with the timing of your purchase. It also tells us that if you are fully invested in stocks at a reasonable weighting for you, then now is definitely not the time to be selling.

People will say on each of these events “this time is different.” They are right. Each time the cause of the decline is different, but the constant is human emotion. Fear and greed. Human emotion is the same and it leads the markets to repeat patterns again and again.

The lesson of this fear and greed is that now is likely a good time to be invested in stocks. It may not be the perfect day, but it is very likely to be a good day, as long as your investment timeline is at least a year.

Other things to note is that of the list of 15+ per cent declines in the U.S., six of the eight had further declines of only zero per cent to five per cent after the 15 per cent point.

In October 1987, the decline was worse, but most of it happened on one day. On Oct. 19, Black Monday, the Dow fell 22.6 per cent. In this case, our theory still holds true, in that once that day was done, even though markets were very volatile over the coming weeks, the trend was clearly positive.

The other time with a larger decline was in October 2008. While many of us remember that it wasn’t until March 2009 that things actually bottomed out, let’s say you bought into the market in October 2008 after a 15 per cent decline. You would have had a pretty rough ride for several months, but you still would have been comfortably ahead by October 2009.

The 2008 example also leads to an important lesson at times like this. Patience is a key for investment success. We are currently in a very volatile market situation where every day is a roller coaster. This will likely continue for a few more days, maybe even weeks. It will not continue for months. Panic selling is not a long term activity. It feels like it when you are in the middle of the days or weeks that it goes on, but it will not continue for long.

The other reaction from many people at this point is they say that they will reinvest cash once things settle down. To borrow from Ferris Bueller: “Markets move pretty fast.”

“Once things settle down,” usually means that the market has had a solid recovery. Over the ‘Next 20 Days,’ six of the eight periods saw significant one month gains. You can certainly wait until some meaningful gains have returned, but there is often a sizeable cost for waiting.

Our key message here is that based on long-term historical data that has seen how actual investors react after a 15 per cent decline, this is a time to be adding to or sticking with your stock investments, and not a time to be selling out. Guarantees do not exist, but data, human emotions and history guide us on what to do.

Reproduced from the National Post newspaper article 6th March 2020.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Are RRSPs really worth it? The answer may surprise you

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More and more people say to me that they don’t contribute to RRSPs. They don’t think it makes sense. If they ask my opinion, my response always depends on the specifics of the person who is asking. For the purposes of this article, I will address a few different scenarios.

For all of these examples, the key factors to consider are the following: In retirement, will the person likely be in a higher tax bracket than they are today, the same bracket, or a lower one? I call this the tax teeter-totter. Will their income likely be meaningfully higher or lower in the next five to ten years? How old are they? Are they married and, if so, how long will it likely be until both spouses have passed away?

Situation No. 1: Higher income, significant RRSP

This person has seen what happens when someone dies with a large RRSP or RRIF. When a single person (including widows and widowers) dies, their remaining RRSP or RRIF balance is fully taxable in the final year. For example, if their final balance is $500,000, nearly half of their account will disappear to taxes. Because of that concern, many people with a sizable RRSP and often high income decide that the RRSP isn’t a good use of their funds. To these people I say, “You are making a mistake.” If you are in a tax bracket where you can get at least a 45 per cent refund on an RRSP contribution, I say take the money today, get many years of tax-sheltered growth, and you can worry about a high tax rate on withdrawals at some point in the future. Depending on the province, this 45 per cent tax rate tends to be in place once your taxable income is above $150,000. While you could make a financial argument that it is possible to be worse off to do an (R)RSP contribution depending on what happens in the future in terms of taxes, given the certainty of tax savings at the front end, I would highly recommend making the contribution.

Situation No. 2: Lower income that could jump meaningfully in a few years, with TFSA room

RRSP Piggy BankIn Ontario, if your income is $35,000, your marginal tax rate is 20.1 per cent. If your income is $50,000, your marginal tax rate is 29.7 per cent. If you are making $35,000 today, but think you might be making $50,000+ in the next couple of years, it is better to put any savings into a TFSA now, and wait to do the RSP contribution until you are making $50,000. This is the situation for many people early in their careers. You will be making almost 10 per cent more guaranteed return (29.7 minus 20.1) by waiting, but will still have the same tax sheltering in the TFSA as you would in the RRSP. In general, if you think you will likely be in a much higher tax bracket in the near future, it is better to hold off RRSP contributions, and save up the room to use when you will get a much bigger refund. As a rule of thumb, I suggest people with a taxable income under $48,000 put any savings into a TFSA before putting it into an RRSP.

Situation No. 3: Income could fall meaningfully in a few years

This is the opposite situation and recommendation to No. 2. If you think that you will be in a much lower tax bracket in the near future (taking time off work for whatever reason), you may want to put money in the RRSP now, and actually take it out in a year when your income will otherwise be very low. Many people do not realize that you can take funds out of your regular RRSP at any time and at any age. While you will be taxed on these withdrawals as income, if the tax rate is very low because you have little other income, it usually makes sense to withdraw the money in those years and put it back when your income is much higher.

Situation No. 4: Couple in late 60s, not yet drawing from RRIF

Some people figure that there is no point to put money into an RRSP in their late 60s because they are just going to draw it out shortly anyways. It is true that one of the values of tax sheltering is the compounding benefit of time. Putting a dollar into an RRSP at age 30 will likely have more of an impact than at age 68. Having said that, often people forget that even if they start drawing funds out of a RRIF at 72 or earlier, they may very well still be drawing out funds 20 years later. There is still many years of tax sheltering benefit. The question goes back to the tax teeter-totter. If they are going to get a 25 per cent refund to put funds into their RRSP, but will be getting taxed at 30 per cent or more when they take it out, then it probably doesn’t make sense to contribute more to their RRSP. It all comes back to their likely income and tax rates once they start to draw funds down from their RRIF.

Situation No. 5: Husband is 72, wife is 58

The answer to the question of how to contribute to an RRSP for couples with a significant age difference depends on the taxable income of each person and the ability to most effectively split income over the next number of years. Larger age gaps can be quite valuable for RRSP investing. One reason is that if the younger spouse has a Spousal RSP, and the older spouse still has RSP room, the older spouse can contribute to the younger spouse’s Spousal RSP. This can be done by the older spouse, even if they are older than 71, as long as the younger spouse is below that age. In this example, if the 58-year-old isn’t working, she can actually draw income out from their Spousal RSP and claim the funds only as their income, even though the 72-year-old had benefitted from the tax advantages of contributing over the years. As a reminder, if the younger person had a large Spousal RSP and the older one had no RSP or RIF, they wouldn’t be forced to draw any income because the younger partner was not yet 71. The one area to be careful of is that for the income to be attributable to the 58 year old and not the 72-year-old, there can’t be any contributions to the Spousal RSP for three years. To take advantage of this scenario, maybe the older partner contributes for many years to the Spousal RSP, but stops three years before the younger spouse plans to draw the funds.

While the RSP is generally a positive wealth management tool for many Canadians, there is a time to contribute, there is a time not to contribute and there is a time to withdraw funds. Each situation may create opportunities to maximize your long-term wealth. Choose wisely.

Reproduced from the National Post newspaper article 19th February 2020.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Strategies to Make Your Money Last Longer in Retirement and to Reduce Taxes

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Lorne Zeiler, Portfolio Manager and Wealth Advisor, was one of the experts interviewed on current strategies that can be used by investors to reduce overall taxes paid in retirement and to the estate. Lorne Zeiler focused on the benefits of gifting.

gam-masthead
Written by:
Special to The Globe and Mail
Published November 11, 2020

Most people spend decades saving and investing for retirement. Once they get there, the focus shifts to spending their hard-earned money – and maybe leaving something behind for family or charities.

The key is having enough money to live comfortably in retirement, while also continuing to generate investment income and reducing taxes, where possible. It helps to have a financial strategy, including which accounts to draw from and when, to help meet your retirement needs and goals.

Below are some tips for managing money in retirement, to make your assets last longer.

Maximize government benefits

Most Canadians contribute to the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP) during their working years, benefits that are paid out in their retirement years. Many Canadians also qualify for other government benefits such as Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).

These benefits together can provide a total of about $25,000 in retirement income for the average Canadian, says Carol Bezaire, senior vice-president of tax, estate and strategic philanthropy at Mackenzie Investments.

The OAS and GIS government benefit programs aren’t based on the amount contributed over a person’s working life, but are instead dependent on marital status and income. It’s why Ms. Bezaire says it’s important to maximize any available tax credits that can affect your income level, such as the federal age amount non-refundable tax credit, which is available to individuals who are 65 or older and can be claimed on your personal income tax return.

“If you plan your other retirement income wisely, you can create a cash flow that allows you to access as much in government benefits as possible,” Ms. Bezaire says.

Make tax-efficient withdrawals

Kathryn Del Greco, vice-president and investment adviser with Del Greco Wealth Management at TD Wealth Private Investment Advice in Toronto, says most of her clients use their non-registered savings and investment accounts as their first source of cash flow in retirement, letting the more tax-efficient accounts such as the registered retirement savings plan (RRSP), registered retirement income fund (RRIF) or tax-free savings account (TFSA) continue to benefit from tax deferral or avoidance, in the case of the TFSA, for as long as possible. The plan will, of course, vary depending on the client’s age and other factors, such as the start of a company or government pension payout.

Ms. Bezaire recommends investors review their non-registered investment mix to favour investments that generate capital gains, which are currently the most tax-efficient form of income. She also suggests minimizing investments that generate interest and foreign dividends, while favouring Canadian dividends and corporate class mutual funds. Interest income is 100-per-cent taxable, and dividends from foreign investment are not eligible for tax credits, unlike Canadian investments. “Be careful with dividend income,” she says. “It is also used in calculating the OAS and GIS clawbacks.”

For most registered plans, such as RRSPs and RRIFs, tax will have to be paid on the amount of any withdrawals as income. To get cash flow from these deferred capital gains, Ms. Bezaire recommends selling some investments each month to get the cash flow you need by using a method called a systematic withdrawal plan (SWP). These types of withdrawals can be set up monthly, quarterly or annually. With a SWP, investors are taxed on the capital gain or loss triggered from the withdrawal, which has preferential tax treatment, while the balance is a return of your original investment, which is not taxable.

Consider pension-splitting

For couples in which one partner has significantly greater pension income than the other, pension-splitting can be an effective way to reduce taxes in retirement, says Jamie Golombek, managing director of tax and estate planning at Canadian Imperial Bank of Commerce.

The government allows Canadians to split up to 50 per cent of most pension income with their spouse.

Mr. Golombek says that, for each $10,000 of pension income allocated to a spouse, the tax savings could be up to $3,000 annually, depending on which province you live in and the difference in tax rates between spouses. He notes the income reduction can also help preserve some income-dependent benefits from government programs such as OAS.

Go ahead and gift

Gifting assets isn’t just a kind thing to do, but can help reduce taxes in an estate, says Lorne Zeiler, vice-president, portfolio manager and wealth advisor at TriDelta Financial in Toronto. In Canada, there are no taxes on gifting assets, for either the giver or receiver, unless an asset is sold before the gift is made.

One strategy Mr. Zeiler favours is opening TFSA accounts for kids that can be funded annually. “They are likely in their prime spending years,” he says. “so saving may be difficult and by opening TFSAs, this allows the gifted assets to grow tax-free.”

Also, gifting money to children or a charity can provide support when they need it most.

Use your home

Retirees shouldn’t overlook their homes as a potential part of their retirement plan. “A home is often the most valuable asset people will own in their lifetime, which means they may want or need to use it to help fund their retirement,” Mr. Golombek says.

One option is to rent your home, or part of it. You will be taxed on rental income, after deducting related costs, which may include expenses such as utilities and maintenance. Another option is downsizing to a smaller home with fewer expenses, particularly if the upkeep of a larger home becomes too onerous.

If you sell your home and it qualifies for the principal residence exception, you will not be taxed on the capital gain, Mr. Golombek says. If it is not your principal residence, you will generally be taxed on 50 per cent of the capital gain.

If you can sell your current home and can get more money after tax than it would cost to buy or rent a new home, you may be able to put the difference toward retirement savings, he says.

Get retirement-ready

We make career plans, vacation plans, even dinner plans, but too often people don’t make a plan for what can be their most important stage in life: retirement. And while having a plan sooner, rather than later, is always recommended, it’s never too late to seek the help of an adviser to figure out how to make your assets last in retirement.

“If you haven’t done a financial plan yet, now is the time to do so,” says Ms. Del Greco.

It’s crucial for retirees to have a clear understanding of their expenses, cash-flow needs, sources of income and taxes, Ms. Del Greco says.

Working with an adviser can help investors assess their current financial situation and identify objectives to help them maintain the quality of life they’re seeking in retirement.

“Because your time horizon is not as long as it once was when you were younger, decisions you make today will have a significant impact on your ability to enjoy your retirement years stress-free,” Ms. Del Greco says.

Advisers can also help investors assess their risk tolerance, which may be less in retirement with the focus on preserving wealth.

Ms. Del Greco recommends retirees maintain one or two years of their income needs in safe, liquid, low-risk investments, which gives them the flexibility not to have to sell equity positions at a loss during a period of volatility.

Lorne Zeiler
Presented By:
Lorne Zeiler, CFA®, iMBA
Senior VP, Portfolio Manager and Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Tips on How to Get the Most from your RRSP

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Lorne Zeiler, Portfolio Manager and Wealth Advisor at TriDelta Financial, was one of the experts asked about strategies to maximize the benefit of RRSP accounts and how to reduce overall taxes based on the timing of withdrawals and use of Spousal accounts.

gam-masthead
Written by:
Special to The Globe and Mail
Published February 7, 2020

The season for Canadians to make their last minute contributions to their registered retirement savings plans (RRSPs) for the 2019 taxation year is in full swing. The investment industry is pulling out all the stops to educate Canadians on the advantages of putting their retirement nest eggs in these tax-deferred vehicles.

But while Canadians hold a total of more than $40-billion in their RRSPs, there remains a lot of confusion over what they actually are and how they work.

We spoke to three investment experts on the front lines to find out some of Canadians’ biggest RRSP misunderstandings.

Sara Zollo, financial advisor, Sara Zollo Financial Solutions Inc. at Sun Life Assurance Co. of Canada

One thing most Canadians understand is the immediate tax break that comes with an RRSP contribution. Each dollar invested is deducted from taxable income, which results in a tax refund from our highest tax bracket.

But Ms. Zollo says many people don’t understand that those contributions and any gains they generate are taxed fully when withdrawn.

”People think that it’s not a big deal. ‘I need some extra money, I’m just going to take it from my RRSP.’ You’ve just done two negative things: You’ve added that income to your taxable income for the year and you have now lost that contribution room,” she says.

The tax implications of withdrawing from your RRSP are the same as contributing – but in reverse. Each dollar is added to total taxable income in the year it’s withdrawn. Those in a higher tax bracket could actually be paying more taxes than they saved when they made their contribution.

To make matters worse, allowable lifetime RRSP contribution space is limited and not regenerated once a withdrawal is made. Ms. Zollo says many Canadians confuse this aspect of the RRSP with a tax-free savings account (TFSA), in which contribution space is regained the year after a withdrawal is made.

She notes that many of her clients are aware of the exceptions to the rule if funds from an RRSP are withdrawn for a down payment on a first home or to go back to school – provided they are returned to the RRSP after a certain time period.

In any other case, she says, the best time to withdraw from an RRSP is during a year when the plan holder’s taxable income is low. That’s usually in retirement, but it can also be during difficult times.

“If somebody lost their job and they have no other source of income, that’s a worthwhile time to revisit an RRSP withdrawal,” she says.

Lorne Zeiler, vice-president, portfolio manager and wealth advisor, TriDelta Investment Counsel

When an RRSP holder turns 71, the plan must be converted to a registered retirement income fund (RRIF). A RRIF is like a reverse RRSP: Money goes out instead of going in.

Once an RRSP is converted to a RRIF, the Canada Revenue Agency requires minimum withdrawals based on the total amount in the plan, which could result in withdrawals in a higher tax bracket. If the amount reaches a certain threshold, Old Age Security (OAS) benefits could be lowered or clawed back.

Mr. Zeiler says many Canadians aren’t aware they can lower their tax bills earlier in life by converting their RRSPs to RRIFs before they turn 71.

“It’s a phenomenal time to take [assets] out from an RRSP or RRIF, if they’re quite large, because that might be your only or main source of taxable income, so you could withdraw it at a very low tax rate,” he says.

Mr. Zeiler says it might make sense for investors with high-value RRSPs to make the conversion to an RRIF before they begin collecting OAS or Canada Pension Plan (CPP) benefits, which are included as taxable income.

Other benefits of an early conversion include lower fees for RRIF withdrawals and avoiding a mandatory withholding tax on RRSP withdrawals.

“You can open a RRIF, convert as much of your RRSP into that RRIF and have a source of income. As long as you’re only taking the RRIF minimum, there’s no withholding tax,” he says.

Mr. Zeiler says another common misunderstanding is that spousal RRSPs are irrelevant now that income-splitting is allowed for couples when they turn 65. Spousal RRSPs permit one spouse to contribute to another spouse’s RRSP and deduct that contribution from the former’s income.

The final objective is to withdraw more RRSP dollars in a lower tax bracket in the lower-income spouse’s hands during retirement, but he says a spousal RRSP is a good form of income-splitting if the spouse retires before 65.

“It only works if it’s a couple, one has a significantly higher income and the other one is more likely to retire early,” Mr. Zeiler says.

He cautions that withdrawals cannot be made from a spousal RRSP until at least three calendar years after a contribution, or it will be taxed in the contributor’s hands.

Mr. Zeiler also says a spousal RRSP is a good hedge in the event the federal government no longer allows income-splitting after 65.

”There’s no limitations to income-splitting today. Who knows? In the future that could change,” he says.

Evelyn Jacks, president, Knowledge Bureau Inc.

Although March 2 is the RRSP contribution deadline, it’s only the deadline to apply any contributions against income from 2019.

Ms. Jacks, a tax expert, says many RRSP holders don’t realize they can carry their contribution room forward indefinitely.

“If your income was unusually lower in 2019 than you expect it to be in 2020 or future years, you can choose not to take the deduction for the contribution that you made and carry those deductions forward to a future year when you expect your income to be higher,” she says.

RRSP contribution limits accumulate by 18 per cent of the previous year’s income. The maximum for the 2019 taxation year is $26,500.

Ms. Jacks blames much of the confusion on the drive to focus on annual contribution deadlines for a quick tax refund and not big-picture tax savings.

“People should think of their RRSPs all year long,” she says.

Lorne Zeiler
Presented By:
Lorne Zeiler, CFA®, iMBA
Senior VP, Portfolio Manager and Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

These unfair tax policies are putting a burden on women and seniors and need to be changed now

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Here’s a scenario I’ve seen several times in my career as a wealth manager. A retired couple that receives two full CPP payments and two full Old Age Security (OAS) payments is able to fully split their income for tax purposes. Then one spouse dies. The survivor only receives one CPP payment, no OAS, and often has a higher tax rate on less family income because they now have one combined RRIF account that must withdraw more funds on a single tax return. It hardly seems fair, because it isn’t.

The scenario highlights just one of a number of thoroughly unjust tax policies that negatively affect hundreds of thousands of Canadians each year. Many of the policies are particularly harmful to older women because they hit those who are single/widowed and over the age of 65 — a group that contains a much higher percentage of women than men.

As we head into a new decade, and in the spirit of eternal optimism, I am providing a list of four main offending policies in the hope that some political titans vow to fix them.
Without further ado, here are the festering four:

1. Income splitting of a defined benefit pension, prior to age 65

THE SITUATION: If you receive a defined benefit pension at any age, you can split the income with your partner for tax purposes. However, if you convert some or all of your RRSP to a RRIF and withdraw money before age 65, you can’t split the income. You have to wait until age 65.

WHY IT MATTERS: Income splitting is another way of simply saying “pay less in taxes.” If you can income split you will most likely keep more of your pension money than if you can’t. As a simple example, if one person earns $120,000 in Ontario, their tax bill will be $32,895 (with no deductions). If instead, that person is able to fully split income and two people now show $60,000 in income, the total tax bill is $22,050. On the same amount of income, the tax bill is $10,845 lower.

WHO IT AFFECTS: Everyone who does not have a defined benefit pension. These days, most employees who have a defined benefit pension work for the government or a quasi-governmental organization. The private sector now has a very low percentage of employees in a defined benefit pension. To oversimplify, working for the government provides a sizable unfair tax advantage for those under 65 compared to those working in the private sector, without a defined benefit pension. It also benefits couples over singles.

HOW TO FIX IT: Apply the same income splitting age on RSP/RIF withdrawals as on defined benefit pension payments. If that is deemed too expensive for the government, do an income-splitting cap of something like $20,000, but apply it equally to all those of a specific age regardless of what type of retirement pension plan they have.

2. Couples tend to receive more dollars per person than singles in Old Age Security (OAS)

Older woman calculating her taxesTHE SITUATION: Current OAS is more than $7,300 per person per year. If you are collecting OAS starting at age 65, your income can be up to $79,000 before any of your OAS is clawed back. At an income of $128,000 it will be fully clawed back.

WHY IT MATTERS: This is significantly unfair to retired singles. If you are single and your income is $130,000, you will collect no OAS. If you are a couple with household income of $130,000, and you can fully split your income, you will collect about $14,700 of OAS every year indexed to inflation.

WHO IT AFFECTS: Single/widowed seniors get the short end of the stick, and they are more than twice as likely to be female. I have seen many cases where a couple receives two full OAS payments. When one passes away, the survivor suddenly receives $0 in OAS because all of the income (usually RIF income) now sticks to one person instead of being split. According to Statistics Canada roughly 70 per cent of those in long-term care and retirement residences are female. As far as private residences (houses, apartments, condos), 40.2 per cent of women aged 80 to 84 live alone, while only 18.6 per cent of men in the same age group live alone. However you slice it, it appears that at least twice as many single seniors are woman as opposed to men.

HOW TO FIX IT: Have the OAS clawback be based on a dual-person rate or a single-person rate, such that two-person families might see a little more clawback and single-person families see a little less. Given that the current clawback kicks in at $79,000 for one person, the two-person ‘family’ rate could be set at a little less than double that, say $145,000 (with full splitting, the current cutoff for two people is effectively $158,000). The new single-person clawback cutoff could then be raised to about $85,000. The idea is to massage the clawback criteria so that people are much less likely to go from double OAS payments to zero when one dies or gets divorced.

3. Effectively losing the CPP Survivor Pension

THE SITUATION: If two people in a couple are both collecting a full Canada Pension Plan benefit and one of them dies, the other will receive a one-time $2,500 death benefit, and then they will lose the entire CPP payment of the person who died. On the other hand, if the same couple has one person who is collecting a full Canada Pension Plan and their partner never paid into the plan and collects $0 of CPP, and either of them die, the net result is that they will continue to collect one full CPP amount. The reason is that no individual is able to collect more than 100 per cent of a CPP benefit. However, if one person is currently receiving less than 100 per cent, and let’s say her partner dies, that person is able to top up her CPP payment up to 100 per cent out of the amount that was being collected by her partner.

WHY THIS MATTERS: A full share of CPP in 2019 is over $13,800 a year. This is a significant amount of money. To go from receiving up to $27,600 a year and having it drop to $13,800 is a big impact when both people have contributed a lot to CPP over the years.

WHO IT AFFECTS: These rules almost provide an incentive to only have one working partner over the years. It hurts couples in which both partners worked full time. It especially affects couples who both work and in which the male is much older than the female, as this will lead to a longer period of one CPP payment as opposed to collecting two.

HOW TO FIX IT: Most defined benefit pensions have a survivor pension that pays out 60 per cent to 70 per cent of the pension to a surviving partner. You could change the CPP so that if a survivor is already receiving a full CPP payout based on her own contributions and her partner dies, she should receive 60 per cent of their partners’ CPP as well. Essentially make the maximum payout to an individual up to 160 per cent of a full CPP payout. In order to fund it, we could slightly lower a full CPP payout for everyone. In cases where only one person contributed to CPP, and one of the couple dies, then that person would be capped at receiving 100 per cent of the CPP. In this way, a lifetime of CPP contributions doesn’t go for naught if one spouse dies.

4. The Canadian dividend gross up costs OAS dollars

THE SITUATION: In simple terms, Canadian dividends from public corporations are more tax efficient than interest income and foreign dividends. For example, at $70,000 of income in Ontario, the marginal tax rate on income or foreign dividends is 29.65 per cent but the marginal tax rate on eligible Canadian dividends is just 7.56 per cent. This is a very big positive for investing in Canadian stocks that pay dividends. However, there is one nagging problem. The CRA likes to make things complicated, and in order to sort out something called tax integration for corporations, they have set up a complicated way to tax Canadian dividends. The tax formula is to ‘gross up’ a dollar of Canadian dividend income by 38 per cent and then apply a dividend tax credit to get to the right amount of taxation on the dividend. When the CRA determines your income for a variety of income tests, they take your net income — which includes the grossed up dividend income.

WHY IT MATTERS: We discussed the minimum OAS clawback at net income of $79,000. Let’s say you have $70,000 of taxable income from RRIFs, interest and global dividends. At this amount you would receive full OAS. Instead, if you had the same $70,000 of income but it was all Canadian dividend income (an unlikely scenario but good for making this point), it would be grossed up by 38 per cent, and your net income would be considered $96,600. Now your OAS would likely be clawed back by $2,640 a year.

WHO IT AFFECTS: This is an issue that exists for no good reason. At the end of the day, it isn’t the worst of the festering four, but does slightly punish seniors who invest in Canadian companies that pay dividends, especially those who check in around the $80,000 income bracket and are already having some OAS clawed back.

HOW TO FIX IT: I am sure that the strategies around corporate tax integration are complicated, but on a personal tax return, is it that hard to simply tax Canadian dividends using personal tax rates without any gross up? If there was no gross up calculation on a personal tax return, then there is no longer an OAS net income issue. Problem solved.

Reproduced from the National Post newspaper article 23rd January 2020.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221
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