How higher income earners can take advantage of federal bonus to bolster retirement income
OAS has a lower profile than its vaunted TFSA and RRSP retirement cousins but advisors have been reminded that clawback strategies can form an important part of a client’s financial plan.
Canada’s Old Age Security pension programme kicks in for most residents and citizens when they turn 65. However, the clawback begins this year at $79,000, meaning that for each dollar of taxable income over that amount, the amount retained by the recipient is reduced by 15% all the way up to $128,000. After that, OAS is eliminated.
For income earners earning more than the top threshold, you can defer OAS to 70 and receive a deferral bonus from the federal government. A client’s monthly pension payment will be increased by 0.6% for every month you delay receiving it, up to a maximum of 36% at age 70.
Craig Hughes, director of tax and estate planning at IG Wealth Management, told WP that this makes sense for many high earners aged 65-70. He said: “If you're in a situation where you commence it at 65, it's all going to get clawed back anyway, so you may as well push it out and benefit from the federal bonus.”
Supplementing that with money from the client’s TFSA also make sense as it doesn’t impact OAS in any way. Others may choose to top up income via their RRSP to avoid affecting their OAS, especially if they choose to retire early at 60.
However, Hughes warned: “On the flip side, you don't get pension income splitting if you go down that type of plan before 65. So that's not necessarily advisable, but it's something that can be looked at. And then if people have non registered investments, the common strategy is to use certain series distributions of return of capital.”
For this, instead of systematically withdrawing assets from their non-registered and triggering capital gains, there are six distribution series that provide return of capital which reduces cost base but doesn't have any immediate taxation effect or impact OAS clawback.
The major OAS changes concerned the guaranteed income supplement. Lower income earners can get a supplemental amount through OAS. The age you are eligible depends on age and marital status but the recipient can receive $3,500 of income without impacting their GIS.
Last year’s budget proposed to increase that threshold to $5,000 as well as have a 50% exemption for amounts up to $10,000.
Hughes said: “The net effect is it’s increasing all the income thresholds, so people who may not have qualified before might find themselves in a situation where they might be eligible for the supplement or they might receive a boost in the amount that they received. [The Government] is really trying to enhance this program in 2020 to put more money in the pockets of individuals, who are eligible for OAS, through the supplement.”
