The good news for seniors -- you receive a variety of tax assisted benefits and tax credits from the federal government that are not available to others. The not-so-good-news is that these benefits are income-tested and that can result in clawbacks from Old Age Security (OAS) payments and the Age Credit.
OAS is a monthly benefit available to most Canadians age 65 or older. You will be required to repay 15% of the amount by which your net income for 2012 – which includes your OAS benefit – exceeds $69,562. When your net income exceeds $112,966, your entire OAS benefit is clawed back.
Age Credit is a non-refundable tax credit available to Canadians age 65 or older. For 2012, the maximum amount you can claim as an Age Credit is $6,720. This amount is reduced by 15% of your net taxable income in excess of $33,884 is totally gone when your taxable income reaches $78,684.
You can avoid OAS and Age Credit clawbacks by keeping your taxable income to the absolute minimum required to meet your needs.
Here are some strategies for doing just that.
• Pension income splitting You can allocate up to 50% of ‘eligible pension income’ – including payments from your investments held within a Registered Pension Plan (RPP) (at any age) and Registered Retirement Income (RRIF) (at/after age 65) to your lower earning spouse, which usually reduces your family’s overall tax bill and clawbacks.
• Other income-splitting strategies You can gift or loan assets to your spouse for investment purposes, contribute to investments held within a spousal RRSP (if your spouse is under age 71), and/or change who pays for daily living expenses and who invests.
• Withdraw the minimum for your RRIF Withdrawals from investments held within a RRIF are fully taxable, so consider withdrawing only the minimum each year. If you have a younger spouse, base your withdrawals on their age – this will produce a smaller minimum withdrawal.
• Invest in TFSAs Contributions to Tax-Free Savings Accounts (“TFSA”) generate tax-free investment income. TFSA withdrawals are not taxable, so do not result in clawbacks.
• Seek non-registered investments that offer preferential tax treatment Only 50% of the capital gains generated by equity investments are taxable income, which may result in less of your income being subject to clawbacks. Another strategy to consider is tax-advantaged or switch funds that allow you to buy and sell investments without paying capital gains taxes until you leave the fund structure – so you can choose to defer tax payments to a year when your income is lower.
The right strategies can definitely help you avoid clawbacks, reduce your tax burden and preserve your wealth. But to avoid falling afoul of complex tax rules, talk to your professional advisor first.