The Canada Child Benefit is one of the most generous government benefits in Canada and it just increased! Unlike many government benefits, the Canada Child Benefit is available to low, moderate, and also some high income families.
The amount you receive from the Canada Child Benefit (CCB) depends on a few factors, one is the taxable net income for the family (line 23600 on your tax return), another is the number of children in the family, and the final factor is the age of each child.
The Canada Child Benefit is an “income tested” government benefit. The higher your taxable net income is, the lower your Canada Child Benefit will be. For some high income families, at a certain level of income the Canada Child Benefit will be reduced to $0. Anyone with income above that income level will not receive any benefit. The tricky thing is that this income level is different depending on the number of children and their ages.
The Canada Child Benefit also changes every year. New benefits start in July and are based on prior years tax return (the first payment of the updated benefit is July 20th).
The Canada Child Benefit also increases with inflation. The new 2020 Canada Child Benefit has increased by 1.9% versus 2019.
So how much Canada Child Benefit can you expect in July? We’ve got a table below that shows the Canada Child Benefit based on family taxable net income (line 23600) in $10,000 increments, so you can figure out generally how much you can expect in July
What are OAS clawbacks? How can you avoid them? How impactful are OAS clawbacks in retirement?
The typical retiree will receive an OAS benefit of $7,362 per year (in 2020) and over the course of a 30-year retirement would receive payments of $220,860 (in today’s dollars). That is a significant amount of retirement income!
OAS clawbacks can reduce this income all the way to zero. OAS clawbacks are 15% of net income, so they can have a big influence on a retirement plan. Experiencing full OAS clawbacks would mean that a retiree needs to make up this income on their own through extra investment assets. This may require hundreds of thousands in extra investment assets.
Avoiding OAS clawbacks is an important part of retirement planning. We’d like to avoid these clawbacks if possible. Through various strategies we can reduce or eliminate these clawbacks in retirement. This can be very beneficial to a retiree.
There are a few strategies that can help retirees avoid OAS clawbacks. Which strategy makes sense will depend on the retirees sources of income and their financial assets. In this post we’ve got 7 strategies to consider if you want to avoid OAS clawbacks in retirement.
But first, what is an OAS clawback?
Planning retirement income is one of the most challenging aspects of a retirement plan. There are often multiple income sources of income to plan for, as many as 5+ for individuals, and as many as 10+ for couples. These income sources also “phase in” at different times throughout retirement.
Here are some of the most common sources of retirement income…
1. Government pensions like…
– CPP (Canada Pension Plan)
– OAS (Old Age Security)
2. Defined benefit pensions
3. Registered accounts like RRSP/RRIF
4. Locked-in registered accounts like LIRA/LIF (and Defined Contribution Pension Plans)
5. Government benefits like GIS
6. TFSA accounts
Understanding how much income to expect from each of these income sources can be a challenge. They may start at different times in retirement, they may also increase with inflation or not.
On top of understanding how much income these different sources may provide it’s also important to understand how they’re taxed. Some of these income sources are taxed differently. Some are also eligible for income splitting at different points in retirement. This income splitting is a distinct tax advantage for couples and shouldn’t be ignored.
In this post we’re going to look at the seven most common sources of retirement income and some of the planning considerations to keep in mind when planning your retirement income.
Warning: Because of the complexity when planning retirement income it’s impossible to fully highlight all the nuances for each of these sources of retirement income in one post. If you feel uncomfortable planning your retirement income then please speak with a professional (ideally an advice-only financial planner) about building a custom retirement plan. Understanding the phasing of retirement income sources, the tax implications, and the possible government clawbacks on benefits like GIS is well worth the money.
What is a pension adjustment? What is a pension adjusted reversal? If you’ve recently done your taxes or received your notice of assessment you may be wondering what these terms mean. You may have noticed large amounts of money being attributed to these items. You also may have noticed that they affect your available RRSP contribution room.
Anyone with a registered pension plan (RPP) or deferred profit sharing plan (DPSP) will notice that they’re receiving a pension adjustment.
The purpose of the pension adjustment is simple, it’s meant to equalize registered assets between those with employer sponsored pensions and those without. It reduces RRSP contribution room for those who receive (or will receive) benefits from a pension plan or deferred profit sharing plan.
The maximum anyone can put into their RRSP is 18% of previous years earned income up to the annual max. The pension adjustment reduces this new RRSP contribution room, sometimes to nearly nothing, in an attempt to make things more fair. The idea is that the maximum that can be put into registered savings (either pension, DPSP or RRSP) should be fair for everyone.
To do this effectively we need the pension adjustment (PA) and when people leave a pension or deferred profit sharing plan we need a pension adjustment reversal (PAR) (more on that later).
Dividends from Canadian corporations receive some special tax treatment that can make them an attractive investment in non-registered accounts. This special treatment means that they can help lower your average tax rate, especially in retirement.
But this special tax treatment makes it a bit confusing to understand how dividends are taxed. To calculate tax on Canadian dividends there are things like “gross ups” and dividend tax credits to consider.
Despite the extra confusion caused by this special tax treatment it can be very attractive to invest in Canadian companies. For most people there is a significant tax advantage when receiving Canadian dividends. For example, in Ontario, a retiree in the lowest tax bracket will experience a negative tax rate on eligible dividends!
The way these eligible dividends are taxed can help offset other income from CPP, OAS, pensions and RRSP withdrawals. With a bit of tax planning this advantage could add thousands in after-tax income for a retiree.
In this post we’ll look at how dividends are taxed, the difference between eligible and non-eligible dividends, and we’ll look at an example of how eligible dividends can help lower taxes in retirement (all the way to zero!).
Lastly, we’ll also look at how the dividend gross up can also trigger OAS clawbacks for high income retirees. A surprising negative of the way dividends are taxed (although it’s still an attractive form of income).
At some point every retiree with an RRSP is going to need to make a decision about converting their RRSP to a RRIF. The Registered Retirement Income Fund (RRIF) works very similarly to the RRSP with a couple notable exceptions.
One of those exceptions is that there is a minimum RRIF withdrawal. Retirees need to make this minimum withdrawal from their RRIF each year. This minimum withdrawal escalates each year as the retiree gets older. By the time a retiree reaches their mid-90s they are forced to withdrawal 20% of their RRIF each year!
Because the withdrawal is a minimum, and conversion from a RRSP to a RRIF is mandatory, this often leads retirees to believe that keeping money in a RRIF is a good idea. After all, if they’re being forced to take money out, wouldn’t that suggest that keeping money in is a good idea?
For many retirees, taking out only the minimum RRIF withdrawal each year is actually a bad idea. Many retirees would benefit from a different RRIF withdrawal strategy. Many retirees would benefit from taking out more than the minimum each year. They would increase their financial flexibility, they would decrease the tax on their estate, and they could even qualify for certain benefits late in retirement.
RRIF withdrawal strategy is especially important now. The federal government just announced that the minimum RRIF withdrawal for 2020 will be reduced by 25%. This may lead many retirees to “take advantage” of this opportunity when it’s not necessarily in their best interest.
In this post we’ll look at RRIF withdrawal rules, the minimum RRIF withdrawal percentage by age, and we’ll explore two scenarios where we show how a retiree can benefit from RRIF withdrawals that are larger than the minimum.
We’ll also explore how this strategy is even more impactful now, after a large stock market correction.