Taking advantage of opportunities within our tax system is even more important now that you're retired than it was during your working years. That's because many of youre retirement benefits are based on income you report on your annual tax return.
Today, too much reported income on your tax return can result in a clawback in your Old Age Security (OAS), as well as reductions for your age credits and medical expense credits.
Avoiding this situation takes more than simply creating tax credits - which just reduce your tax owing. You need to look at ways to actually reduce reported income.
With significantly different tax provisions applied to deferent types of income, realigning the non-registered component of your portfolio can be a good start.
Claw back the Clawbacks by reducing your net income before adjustments of your tax return on line 234
Canadians age 65 and older may qualify for two valuable government benefits - Old Age Security and an Age Credit. However, if the income reported on line 234 of the Federal Income Tax Form is too high, these benefits can be clawed back and, in some cases, forfeited altogether. This can result in the loss of thousands of dollars in benefits.
Here are two solutions that can actually reduce your reported income and thus preserve more of your OAS and age credit:
1. Carefully structure your non-registered income
Active management of income-generating investments can significantly affect the way income is taxed, and may help reduce clawback. The following example, based on $10,000 of non-registered investment income, shows both the reportable income and after tax impact of different types of investment income; assuming a 45% marginal tax rate.
2. Create dollar-for-dollar tax deductions
When retirement arrives, most of the familiar deductions (child support, union dues, etc.) are no longer available. However, there are still some appealing options.
RRSP top-up at age 71: Those with unused RRSP room at age 71 should make a lump sum final contribution during that year, if you continue to have taxable income past the age of 69, the RRSP deduction limit can still be used and spread over several years if need be.
Borrow-to-invest: By using RRIF income to pay the interest on funds borrowed to invest, a tax deduction can be created. This strategy is for investors with discretionary income not needed for living expenses.
If you are interested in learning more about this type of tax savings strategy or investment options, please contact Martin Kosterman at email@example.com or Rob Whipp at firstname.lastname@example.org or 905-844-7700 Oakville , Toronto 416-447-7945 or our limited toll free number 1-800-663-5463 - Ontario business hours only
Our thanks to Manulife Financial - Wealth Management and Regulatory Consulting Group, for information contained within this article.
GETTING ADVICE Notice: Fiscal Agents Financial Services Group are not engaged in rendering tax, accounting or legal professional services or advice. The comments in this article or any found on this website are not intended or should be considered investment advice or tax advice to any party, nor should they be relied upon to replace specific professional advice. Before acting on material contained herein. Readers should seek advice that is appropriate to their personal circumstances from a professional advisor.
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