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Davies Otwell

Jamie Golombek: Here’s how making an RRSP contribution could save you big bucks for 2020 and beyond

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The March 1 deadline for registered retirement savings plan (RRSP) contributions for the 2020 tax year is less than 10 days away, and, even if you’ve never contributed before, this is the year you may want to consider making one to claim a deduction on your tax return and save some tax on any COVID-19-related benefits.

Let’s review the basic rules and then look at a couple of examples of how making an RRSP contribution could save you big bucks for 2020 and beyond.

To claim a deduction on your 2020 return, you need to contribute by March 1, 2021, and the maximum amount you can contribute can be found at the very bottom of your “RRSP deduction limit statement” on your 2019 Notice of Assessment. It can also be looked up online using the Canada Revenue Agency’s My Account portal.

Your deduction limit for 2020 was based on 18 per cent of your 2019 earned income (up to a dollar limit of $27,230), less any pension adjustment from your employer, plus any unused deduction limit from previous years. Earned income includes employment, self-employment and rental income (as well as a few other things.)

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It’s important to note, however, that an RRSP contribution can be deducted against any source of income, not just earned income. In other words, contributing to an RRSP can help you save tax on your employment income as well as your investment income, taxable capital gains and even government COVID-19 related benefits that are taxable.

If you’re one of the millions of Canadians who received COVID-19-related government benefits in 2020, you need to report most of these amounts on your 2020 return. Reportable amounts include: the Canada Emergency Response Benefit (CERB), Canada Emergency Student Benefit (CESB), Canada Recovery Benefit (CRB), Canada Recovery Sickness Benefit (CRSB) and the Canada Recovery Caregiving Benefit (CRCB), all of which are considered taxable income and should be reported on Line 13000 – Other income.

Depending on your total 2020 income, you may owe some tax on your COVID-19 benefits. This is particularly true if you received CERB or CESB payments, since no tax was withheld when they were issued, so there may be a balance owing when you file. If you received CRB, CRSB or CRCB payments, 10-per-cent tax was withheld at source, but this may not be sufficient, depending on what other income you earned in 2020.

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In addition, if your 2020 net income was more than $38,000, you may have to repay 50 per cent of your CRB payments for every dollar in net income you earned above $38,000, to a maximum of CRB received in the year. Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any CERB, CRSB and CRCB payments received (but not CRB).

By making an RRSP contribution by the deadline, you may be able to reduce or eliminate tax owing on any COVID-19 benefits as well as possibly keep more of the income-tested CRB.

Let’s walk through two examples to illustrate how two taxpayers could benefit from making an RRSP contribution and claiming a deduction on their 2020 returns. (For simplicity, CPP/QPP and EI contributions and credits/deductions have been ignored to focus on the income taxes owing.)

Example 1

Tom, an Ontario resident, earned $60,000 annually prior to COVID-19, but lost his job on March 15, 2020. Prior to this, he earned $12,500 in employment income for the first three months of 2020, for which his employer withheld $2,600 in federal and provincial tax. He applied for CERB, and received the full $14,000 in benefits with no taxes withheld. He subsequently applied for CRB, which replaced CERB, and received a total of $6,000 for the last three months of 2020, on which 10 per cent, or $600, was withheld.

Tom’s total income for 2020 was $32,500. His tax liability, after taking into account the enhanced basic personal amount, Canada employment amount and Climate Action Incentive, is $3,419. Since the taxes withheld at source via his employer and the government were only $3,200, Tom would need to pay additional tax of $219.

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If Tom contributes about $730 to his RRSP, he could reduce his tax bill for 2020 to the $3,200 that was withheld so he wouldn’t need to pay any further tax. Of course, whether it makes sense to do so will depend on the rate of return he can achieve on his tax-deferred savings, his anticipated tax rate on withdrawal, and how many years he can leave it in there before withdrawing it in retirement.

Example 2

Jerry, an Alberta resident, was self-employed for much of 2020, earning $50,000 before shutting down his business in the fall and collecting $6,000 in CRB (less 10-per-cent withholding). If he doesn’t make an RRSP contribution, he will be forced to repay the entire $6,000 in CRB since his net income (excluding CRB) for 2020 was $50,000 and he must repay 50 cents of CRB for each dollar of income above $38,000, for a repayment of $6,000 (i.e., ($50,000 – $38,000) x 50 per cent).

Jerry’s taxable income would be $50,000, since he’s not taxed on amounts he didn’t get to keep, and the net federal and Alberta tax liability (assuming just the basic personal amount and Climate Action Incentive) is $8,170. After taking into account the $600 withheld on CRB, Jerry would need to pay additional tax of $7,570, as well as repay $6,000 in CRB received for a total amount owing of $13,570. (For simplicity, we have ignored any tax instalment payments made in 2020, which affect cash flow and not the tax ultimately owing.)

But if Jerry can reduce his income to $38,000 by making a tax-deductible RRSP contribution of $12,000, perhaps by borrowing the funds via an RRSP loan, he would cut his tax owning and get to keep his full $6,000 in CRB (less the associated tax). His tax liability would drop by $1,581, for an effective marginal effective tax rate savings of 63 per cent ($7,581/$12,000).

Even if Jerry withdraws funds from his RRSP well before retirement, provided his marginal effective tax rate in the year of withdrawal was lower than 63 per cent, contributing to an RRSP will have been a smart tax decision. And, to the extent the funds can be left inside the RRSP, Jerry may also be able to enjoy decades of effectively tax-free investment growth to fund his retirement.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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Dennis will lose about $7,000 in after-tax income per year if he pursues a PhD

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In Alberta, a man we’ll call Dennis, 35, has several careers — one as a researcher in health care, one as an administrator on contract for a government agency and one as a graduate student heading for a PhD in medical statistics. His present income of $8,500 per month from his contracts leaves him with an average of $5,519 after tax.

Dennis focuses on his future: He does not expect to have kids, wants to earn his PhD and move from his $298,000 condo to a $550,000 condo. While enrolled in the PhD, Dennis will see his income drop to the $35,000 per year he’ll receive from a scholarship.

E-mail andrew.allentuck@gmail.com for a free Family Finance analysis.

Family Finance asked Eliott Einarson, head of the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with Dennis on the question of cost and return. It’s one that involves calculating his present assets and their future value, as well as the impact foregone income during four years of study will have on their growth. We assume that all tuition costs will be covered by scholarships.

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In this analysis, we will not assume the PhD generates an income boost, because that will depend on what kind of work Dennis ends up doing. If Dennis works in government, he could earn more than he might as an instructor or assistant professor.  As a result, this analysis will probably be on the conservative side, Einarson explains. We are assuming constant RRSP contributions, though the base for calculation could change, and we are excluding any defined-benefit pension that might go with a future job. That, too, could boost retirement income.

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Pricing the future     

Dennis’s present monthly income, $8,500 from salary, leaves him with $5,378 per month after tax. Out of this cash flow, he adds $800 per month to his RRSP on top of $400 added by his employer and $500 per month to his TFSA while paying his condo mortgage of $960 per month, a $284 monthly car loan and $450 for tuition. He is left with $260 he can save for a move to a larger home on top of tapping his RRSP for a Home Buyer’s Plan loan.

In terms of assets, Dennis has a $298,000 condo, $22,000 in his TFSA, $90,000 in several RRSP accounts, $51,000 in a locked-In retirement account and $28,000 in cash. He also has a $20,000 car, bringing the total assets on his balance sheet to $509,000. His debts are modest — just a $157,000 mortgage and a $13,500 balance on the car loan. His net worth is thus $338,500.

Cost of a PhD

At the time he starts his PhD, his part-time income and money from a renewable scholarship, about $35,000 per year, would cover his mortgage and car loan. If he were to sell his condo for its $298,000 estimated market price less five per cent for fees and fussing, the gain less interest and principal paid on the condo might leave him with $126,000. For a $550,000 condo with a 25 per cent down payment, net $137,500, he could use money from sale of the condo plus $11,500 cash on hand. Remaining cash, $16,500, is for unexpected expenses and emergencies.

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We’ll compare Dennis’s retirement income from work at present without the future PhD with income after he gets a PhD.

Retirement income

His RRSPs, excluding the $51,000 LIRA, total $90,000. With future contributions of $14,400 per year composed of $9,600 from his own funds and $4,800 from his employer, total $14,400, will grow to $924,090 in 30 years at this age 65. That sum could generate $45,773 taxable income for 30 years to his age 95. If Dennis were to take the next four years out of the calculation, the RRSP would grow to a value of $790,280 and provide $39,145 for the following 26 years to his age 95.

His LIRA account, with no further additions, would grow from today’s balance of $51,000 for 30 years to his age 65 at an assumed rate of three per cent after inflation to $123,840 and then pay $6,132 for the following 30 years to his age 95.

The TFSA account with a present value of $22,000 with $6,000 annual contributions for 30 years would grow at three per cent per year to a value of $347,416 and could then provide income of $17,209 per year. If the TFSA were to miss four years of contributions early on, it would grow to a value of $291,668 by his age 65 and then provide $14,447 cash flow per year.

At 65, OAS would provide $7,380 per year and CPP $14,100 per year.

Adding up these sources of income, Dennis would have $73,385 taxable income in retirement at 65 for 30 years. After 21 per cent average tax and addition of TFSA cash flow of $17,209, he would have total income of $75,183 per year.

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If Dennis takes the PhD route, he would have $66,757 taxable income. After 20 per cent average tax and addition of $14,447 TFSA cash flow, he would have $67,853 disposable income for the following 30 years.

The income Dennis foregoes while doing his PhD puts a dent in his savings that compounds over time, creating a tangible difference in his retirement, to the tune of about $7,000 in after-tax income per year.

That, however, assumes the PhD does not boost his income.

To make it financially worthwhile, Dennis would have to expect that the additional savings he could make with a PhD would over time grow to be enough to offset the lost retirement income. We can’t predict exactly much of a boost the PhD will bring, if any.

But we can estimate how much more he would have to save per year after earning the PhD to fill the hole from taking four years off.

To replace $7,000 in after-tax income, he would need to save enough to generate $8,300 pre-tax per year over a 30-year retirement.

Using annuity calculations and assuming a return of three per cent after inflation, the lump sum he would need at age 65 is approximately $167,000.

To accumulate that amount from over the 26 years after completing his PhD would mean setting aside $4,220 per year.

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While there is no guarantee of a pay raise, health care is a lucrative field and a PhD subsidized by scholarships is a financially efficient way to enter it. The financial gains of an advanced degree and the value of career doors it opens are likely to exceed the income and savings given up for four years of graduate study, Einarson concludes.

“Knowledge does not have price tags, but in Dennis’s case, it should enhance income. Financially, the PhD should be a good investment.”

Retirement stars: 5 ***** out of 5

Financial Post

E-mail andrew.allentuck@gmail.com for a free Family Finance analysis.

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If you have already repaid, the government will be sending it back to you

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Sometimes, one word can make all the difference.

This week, the federal government officially backtracked on its previous position when it announced that self-employed individuals who applied for the Canada Emergency Response Benefit (CERB) and would have qualified based on their “gross” income but not their “net” income will not be required to repay the benefit, provided they also met the other eligibility requirements.

No need to repay CERB

Readers will recall that back in December 2020, the Canada Revenue Agency sent out 441,000 “educational letters” warning individuals that they may not be eligible for the CERB. The letters were sent out to individuals for whom the CRA said it was “unable to confirm … employment and/or self-employment income of at least $5,000 in 2019, or in the 12 months prior to the date of their application.”

The issue of whether the $5,000 income threshold for the self-employed means “gross” income (i.e. revenues) or “net” income (i.e. net of expenses) has been discussed extensively. It has always been the CRA’s view that the $5,000 refers to net income and thus if you had gross income of $5,000 in the required time period, but netted under $5,000 after deducting business expenses, then you didn’t qualify for the CERB and, until now, the CRA’s position was that you needed to return it.

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This week, the government reversed that position and said that self-employed individuals whose net self-employment income was less than $5,000 and who applied for the CERB will not be required to repay it, as long as their gross self-employment income was at least $5,000 and they met all other eligibility criteria. The same approach will apply whether the individual applied through the CRA or Service Canada.

What if you already voluntarily repaid the CERB based on the government’s previous instructions to do so? Well, you’re in luck as the government will be sending you back any amounts you repaid, with additional details on how, and when, to be announced in the coming weeks.

But, the question on many other self-employed Canadians’ minds this week is: what about those individuals who didn’t apply for the CERB because their “net” self-employment income was under $5,000? It appears that they’re out of luck.

Interest relief

For some Canadians, the 2020 tax year may be the first time in their lives that they won’t be getting a tax refund and may actually end up owing some tax. That’s because, just like Employment Insurance (EI) benefits, the COVID-19 emergency and recovery benefits, including similar provincial benefits, are taxable. And, although tax was withheld at source at a rate of 10 per cent of the benefit amount for the three Canada Recovery Benefits (the Canada Recovery Benefit, the Canada Recovery Sickness Benefit and the Canada Recovery Caregiving Benefit), no taxes at all were withheld from the CERB or the Canada Emergency Student Benefit. In addition, if your 2020 net income was over $38,000, you may have to repay 50 per cent of the CRB payments for every dollar in net income you earned above $38,000 (to a maximum of the CRB received in the year.) Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any CERB, CRSB and CRCB payments received (but not payments received through the CRB.)

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To illustrate, assume Mike, an Ontario resident, was furloughed from his company in mid-2020. His pre-COVID income was $18,000 from which his employer withheld $2,200 in federal and provincial tax. He applied and received $14,000 of CERB, for which no tax was withheld. The result is that Mike would owe about $850 in taxes when he files his 2020 return, after taking into account non-refundable credits for the basic personal amount (federally $13,229), the Canada employment amount ($1,245) and the Climate Action Incentive ($300). (CPP and EI have been ignored for this example).

Now take Heather, whose 2020 income was $44,000 prior to losing her job due to COVID layoffs. She applied and received six periods of CRB for the final three months of 2020, for a total of $6,000 (with $600 withheld.) But, when she files her return, she will be forced to repay $3,000 of the CRB since her total income for 2020 was over $38,000, and the CRB is reduced by 50 per cent for each dollar of income above this amount (i.e. ($44,000 – $38,000) X 50 per cent).

But, what if Mike and Heather don’t have the funds to repay the government by the April 30, 2021 payment deadline?

To help taxpayers like Heather and Mike, the government also announced this week that it will be providing targeted interest relief to Canadians who received COVID-related income support benefits. Once you’ve filed your 2020 income tax return, if you qualify, you won’t be charged interest on any outstanding income tax debt for the 2020 tax year until April 30, 2022, giving you more time and flexibility to pay if you have an amount owing.

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To qualify for this targeted interest relief, you must have had a total taxable income of $75,000 or less in 2020 and have received income support in 2020 through one or more of the COVID-19 measures: the CERB, CESB, CRB, CRCB, CRSB, Employment Insurance benefits or similar provincial emergency benefits.

If you fall into this category, you don’t need to do a thing other than file your return, as the CRA will automatically apply the interest relief measure for taxpayers who meet these criteria. In addition, the government announced that any CRA-administered credits and benefits normally paid monthly or quarterly, such as the Canada Child Benefit and the goods and services tax/harmonized sales tax credit, will not be applied to reduce any taxes owing for the 2020 tax year.

The government estimated that the interest relief measure will provide relief to approximately 4.5 million low- and middle-income Canadians.

No change to filing deadline

Finally, the government confirmed this week that it has not extended the tax filing deadline, meaning that you should file your 2020 return by the normal April 30, 2021 deadline or risk a five per cent late-filing penalty on any amount owing. Self-employed Canadians (and their spouse or partner) should file by June 15, 2021.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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Depending on your total 2020 income, you may owe some tax on your COVID benefits. This is particularly true if you received the CERB or CESB, since no tax was withheld when payments were issued, so there may be a balance owing when you file.

If you received the CRB, CRSB, or CRCB, 10 per cent tax was withheld at source, but this may not be sufficient, depending on what other income you earned in 2020. You can find the income tax deducted at source in Box 022 of your T4A slip, which should be included on line 43700 – Total income tax deducted.

In addition, if your 2020 net income was over $38,000, you may have to repay 50 per cent of CRB payments for every dollar in net income you earned above $38,000, to a maximum of the CRB received in the year. Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any CERB, CRSB and CRCB payments received (but not payments received through the CRB.)

Jennifer Gorman, Social Care Manager for TurboTax Canada, says that if this is your first year facing a balance owing, you want to make sure you file by the deadline, even if you don’t have the cash to pay. “There are two separate penalties. You have interest that accrues if you don’t pay your balance, but there’s also a late-filing penalty,” explains Gorman. The late-filing penalty is five per cent of your balance owing, plus one per cent of the balance owing for each full month your return is late, to a maximum of 12 months.

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Retirement income

The new TFSA balance of $293,728 would provide $14,985 per year for the 30 years to Marcie’s age 95, assuming three per cent annual growth after inflation. The $92,165 non-registered account would provide $4,565 over the same time frame.

In addition to investment income, Henry would have a job pension income of $30,293 per year starting at his age 65.

Their expected annual CPP benefits will be $7,426 for Marcie and $17,185 for Henry. Their Old Age Security income will be $7,384 each per year in 2021 dollars.

When Marcie retires at 65, she will able to thus draw $5,141 from RRSPs, $14,985 from TFSAs, $4,565 from non-registered investments, $7,426 CPP and $7,384 for her OAS for a total $39,500 before tax.

Henry will still be working to his age 65, drawing a salary of $77,868 per year. That’s a family total of $117,368. After splits of eligible income and 15 per cent rate on non-TFSA income, they would have $8,500 per month to spend. That’s ahead of their $8,000 monthly after-tax target.

When Henry reaches 65 and retires, the couple will lose his $77,868 salary but gain his $30,293 job pension, $7,384 OAS and $17,885 CPP based on recently revised contribution rates. That’s a total of $95,062. After splits and 13 per cent average tax that would leave them with $7,054 per month, $946 below their $8,000 per month target.

If Marcie and Henry take control of their spending now, they can make up much of that gap and enjoy their financially secure retirement.

Financial Post

e-mail andrew.allentuck@gmail.com for a free Family Finance analysis

3 Retirement Stars *** out of 5

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We can estimate retirement income in stages: 1) the period from Wayne’s age 62 in retirement to his age 65 with Lilly still working, 2) when Wayne is 65 and drawing CPP and OAS and Lilly is still working, and 3) when both are retired and both drawing CPP, OAS and company pensions.

Retirement income

In stage 1, income will be Wayne’s $40,164 annual pension plus a $8,244 bridge to 65 and Lilly’s $43,903 salary, and $4,767 RRSP income total $97,078. In stage 2, they will have Wayne’s $40,164 pension without bridge, Lily’s $13,788 pension, her $1,716 bridge to 65, his CPP of $13,077, his OAS of $7,384 and RRSP income of $4,767 for total income of $80,896. That would last until stage 3 when their income would be Wayne’s $40,164 pension plus Lily’s $13,788 pension, plus CPP benefits of $13,077 for Wayne and $8,858 for Lilly, two $7,384 OAS benefits and $4,767 RRSP payouts for total income of $95,422.

Assuming they split eligible income, apply eligible pension income and age credits and pay 14 per cent average tax in each stage, they would have monthly after-tax income of $6,960 in stage 1, $5,800 in stage 2 and $6,840 in stage 3. That would easily cover their anticipated spending. An accumulating surplus could pay for the boat or RV or some part could go to a TFSA for a permanent emergency reserve.

Wayne and Lilly can buy the boat or the RV, travel, donate to good causes, or increase financial security by investing their surplus in TFSAs. They have left planning their future to others, but they would do well to take charge of their plans to make the most of their secure and ample resources.

e-mail andrew.allentuck@gmail.com for a free Family Finance analysis

3 Retirement Stars *** out of 5

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This simple example may, at first glance, seem counter-intuitive. After all, with the RRSP Shira is paying tax on the dividend income at her full, ordinary Alberta tax rate of 30 per cent and if she went the non-registered route, her dividend income is only taxed at a 10 per cent marginal rate on eligible dividends. But, of course, her “net” investment in a non-registered investment is lower, and thus her dividend income is lower, because she had to pay 30 per cent tax on her employment income before she could invest.

Another way to look at is that by contributing to an RRSP, you are effectively getting a 100 per cent tax-free rate of return on your net after-tax RRSP contribution. In this case, Shira’s net (after-tax) RRSP contribution was $2,100 (i.e. $3,000 X (1 – .30)), which at a five per cent return, yields $105 of effectively tax-free dividends.

Finally, I would argue that even if your tax rate is higher in the year of withdrawal (or ultimately, in the year of death) than it was in the year of contribution, you could still be better off with an RRSP than non-registered investments because the benefits of effectively tax-free compounding might actually outweigh the additional tax cost of a higher withdrawal tax rate. This, of course, will depend on your expected rate of return, the number of years of compounding available, as well as the types of investment income you might otherwise earn by saving an equivalent amount in a non-registered account.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

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Some provinces have high probate fees payable on death to validate the will of the deceased before distribution. These fees can be avoided by naming beneficiaries, holding assets jointly with right of survivorship, using insurance products, or by establishing joint partner or alter ego trusts. Some provinces charge flat fees for probate, while others charge a percentage. A small percentage of a large estate can still be significant. Despite the cost of probate, the time and effort required may be reasons to try to avoid probate as well.

The risk of living too long is an important possibility to plan for and a risk to mitigate when planning retirement. Family history may contribute to life expectancy, but someone can live to a ripe old age even if their parents did not. There is a 50 per cent probability of a 65-year-old man living to age 89, and for a woman, two years longer, to age 91.

Deferring the start of a CPP or OAS pension to as late as age 70 is a good way to plan for a long life expectancy. A pensioner who lives well into their 80s may be better off in the long run, despite a delay to their pension in the short run. It may mean they need to draw down on their investments earlier in retirement while they hold off on government pensions, but this can be a beneficial strategy for someone who does not have a DB pension plan from their working years. CPP and OAS are increased for every year they are deferred, up until age 70, and are also indexed annually to inflation.

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Olivia’s total invested financial assets, $492,000, put her in a position to hire an investment manager for fees well below the 2.6 per cent average charged by mutual funds. She could have the liquidity she needs, tax planning for when she is 71 and has to convert her RRSP to a Registered Retirement Income Fund and perhaps even better returns along the way. Those fee savings could go straight into her TFSA.

A custom portfolio would be structured and traded for her needs rather than the needs of others. As well, a restructuring of her investments and her tax rate, which will rise when she starts taking Canada Pension Plan and Old Age Security benefits, would be valuable.

Shopping for custom management would be worthwhile, Einarson says.

There are two final matters Olivia should consider.

First is the problem of care, should she need it. At her age, long-term-care insurance policies are costly and constrained in terms of their payouts. She could discuss arrangements for care and how it will be financed with her family as a form of pre-testamentary transfer of wealth, Einarson suggests.

Finally, Olivia also needs to consider what will happen when she passes away, for she has no spouse to whom she could transfer assets. Her capital is substantial and death will be a costly event if her registered investments still contain significant taxable sums.

Those scenarios should be years away. Olivia is healthy and employed, and her income before tax, $90,000 per year, gives her many investment and lifestyle choices. She is headed to a solid retirement.

Retirement stars: Three *** out of five

Email andrew.allentuck@gmail.com for a free Family Finance analysis.

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What is still unclear from this research, however, is whether by excluding capital gains from income, we are excluding individuals whose primary source of income annually is significant capital gains, who arguably are the so-called “rich,” as opposed to the small business owner (or real estate owner) who sold their business (property) and reported a one-time, significant capital gain that moved them into a higher tax bracket for that single year alone.

Canada vs. the world

The Fraser Institute report also compared Canada’s capital gains tax rate to that of other countries and found that Canada’s top capital gains tax rate (27 per cent) is currently above the average for countries in the Organization of Economic Co-operation and Development (OECD), and substantially above the rate in Britain (20 per cent) and the United States (20 per cent).

That being said, with the inauguration of U.S. President Joe Biden this week, and Democratic control of both the House and Senate now established, it’s quite possible that Biden’s pre-election platform to effectively increase the tax on capital gains by treating them as ordinary income for taxpayers earning more than US$1 million could actually be passed. Combined with his plan to raise the top rate on ordinary income back up to 39.6 per cent (from 37 per cent), it would nearly double the current long-term capital gains tax rate.

As for Canada, “raising the capital gains tax rate would weaken Canada’s ability to attract investment and adversely affect our economic recovery,” concluded Clemens. “Canadians across the income spectrum — and the economy as a whole — would benefit from a lower, not higher, capital gains tax rate.”

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

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