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The Money Management Newsletter: Retirement Income Planning
Counting on government benefits to augment your income during retirement?
You may need to take action to protect those benefits

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.

To recap:-

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.

Source of Income
Tax Inclusion
Reported income
(income 234)
Capital gains
Prescribed life annuity
40% (1)
Income Fund with return of capital
30% (2)
Mutual /segregated fund withdrawals
5% (3)

* While dividend income has a higher after tax return than a GIC the amount reported on line 234 of the tax return is the grossed up amount of $12,500. This higher amount on line 234 may trigger an increase OAS clawback or reduce age and medical credits.
Taxable percentage of 40% is approximated for a 65 year old male - Taxable portion will vary depending on age of individual
2 Taxable percentage will vary depending on the fund.
3 Taxable percentage in one year, grows to 20% (or $2,000) in year 10. Using this type of withdrawal for income purpose will erode capital in a down market. 10% rate of return assumed.

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.

Who are ideal candidates? Investors who:

Are retired or near retirement, and

Want to maximize their government benefits.

Taking action to maximize benefits and retirement income:

draw income from a mutual fund or segregated fund with engineered distributions, where a large portion of the income is considered a return of capital

identify investments that could be reconstructed for more favourable tax treatment,

explore the benefits of prescribed life annuities

maximize RRSP contributions, and

consider a "borrowing to invest" strategy.

If you are interested in learning more about this type of tax savings strategy or investment options, please contact Martin Kosterman at or Rob Whipp at 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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© , Fiscal Agents Money Management Newsletter
25 Lakeshore Road, Oakville, On L6K 1C6.
(905) 844-7700


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