Welcome to the second and final instalment of the Investor Clinic post-quiz tutorial, in which we explore questions that readers found especially tricky.
There were two questions about the Old Age Security program that tripped up a lot of readers. The first was question No. 7:
For 2013, an individual can have up to _______ of income before the Old Age Security clawback kicks in:
- a) $66,789
- b) $68,990
- c) $70,954
- d) $114,793
Just 35 per cent of readers picked the correct answer, c.
I chose this question to illustrate that people can have a nice retirement income without getting a penny of their OAS benefits clawed back. Once an individual's net income rises above $70,954 – an amount indexed annually to inflation – OAS benefits are reduced by 15 per cent of the amount by which income exceeds the threshold.
According to the Canada Revenue Agency website, the maximum OAS benefit is currently $549.89 monthly (also indexed to inflation). For 2013, the full OAS pension isn't clawed back entirely until an individual's net income reaches $114,793. So even high income earners can expect to receive some OAS.
Question No. 8 was even tougher:
The age at which a person can start collecting OAS benefits is currently 65. It will increase to _____ by Jan. 1 ______.
- a) 67; 2023
- b) 67; 2029
- c) 69; 2023
- d) 69; 2029
More than three-quarters of readers picked a, which was incorrect. Just 16 per cent chose the correct answer, b.
The confusion is understandable. In the 2012 budget, the federal government announced that the eligibility age for OAS would rise starting in 2023, which explains why so many people picked answer a.
However, the changes are being phased in over a period of six years. Beginning on April 1, 2023, the eligibility age – currently 65 – will rise by one month per quarter. At that pace, it will take until Jan. 1, 2029, for the eligibility age to reach 67.
Another question that flummoxed some readers was No. 12:
12. You can avoid withholding tax on U.S. dividends by holding the shares in a:
- a) TFSA or RESP
- b) RRSP or RRIF
- c) dividend reinvestment plan
- d) all of the above
The most popular answer was d, but the correct answer was b.
Contrary to what some investors believe, holding U.S. stocks in a tax-free savings account (TFSA) or registered education savings plan (RESP) does not avoid the 15-per-cent U.S. withholding tax on dividends. That's because TFSAs and RESPs are not strictly retirement or pension vehicles, and therefore they don't qualify for an exemption under the Canada-U.S. tax treaty.
However, accounts that specifically provide retirement or pension income – including registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and locked-in retirement accounts (LIRAs), among others – exempt U.S. dividends from the usual 15-per-cent withholding tax.