There's been a lot of talk about changes to the Old Age Security program lately, but the Guaranteed Income Supplement (GIS) deserves a lot more attention. For low-income seniors, it could amount to almost $9,000 a year, but a general lack of knowledge in financial planning is leading some people to effectively turn it down.
GIS is a benefit received on top of OAS for seniors whose incomes are below $16,368 (single person). But just as OAS is subject to clawback over a certain threshold, so is GIS. The big difference is that GIS is more aggressively clawed back from people who arguably need it more. The OAS clawback begins once your income has reached close to $70,000 and is clawed back at a rate of 15 cents per dollar. GIS, on the other hand, is clawed back at a rate of 50 cents on the dollar for every dollar of income above $3,500.
This has led to the (not quite yet) conventional wisdom that the Tax Free Savings Account might be a better savings vehicle for low-income seniors. Well, it's a bit more complicated than just that. It's true that an RRSP or RRIF withdrawal made if you are eligible for GIS could effectively be taxed at around 70 per cent since you have to pay your marginal tax rate on the withdrawal and it can reduce your GIS payment by 50 cents per dollar. It's also true that had that withdrawal come from a TFSA, the effective tax rate is zero, since the withdrawal does not affect income-tested benefits. "But there's sort of an alternate universe that exists for lower-income seniors between 65 and 71", says , a social policy consultant.
Remember that an RRSP contribution is an income deduction, so when you make a contribution, your income is lowered. Someone who is 65 and whose income is above $16,368 can reduce that income below the threshold by making an RRSP contribution. All of a sudden, that GIS tap is open.
"So yes, while the TFSA can be a better savings vehicle for many lower-income Canadians, you can't just assume that will always be the case. You need to plan it out. Unfortunately, when I counsel people on this strategy I find that when they bring it to their bank, they get faced with a lot of blank stares", Mr. Stapleton says.
He provided me with a specific case study: Mary is 65 and has a yearly income of about $18,000, which places her above the GIS cutoff. She is eligible for full OAS and has $60,000 in unused RRSP contribution room. Every year until age 71 Mary takes out a $10,000 RRSP loan to reduce her taxable income to $0 and is now eligible to receive GIS. (She maximizes her contribution because every dollar of income is subject to 50 cents of GIS clawback, so the lower her income, the better.) Mary then takes the tax refunds and GIS payments to pay down the loans and over the next six years gets roughly $25,000 in GIS payments she otherwise would have foregone. When the RRSP converts to a RRIF, she faces taxes on mandatory withdrawals, but those taxes and the interest on the loan payments pale in comparison to the $25,000 in GIS plus tax refunds she earned in those six years. Remember, she didn't qualify for GIS before and wasn't going to get it after 71 anyway.
The lesson? We need to seriously tackle planning for lower-income seniors instead of assuming that the TFSA v. RRSP decision is black and white.
Preet Banerjee, B.Sc, FMA, DMS, FCSI, is a W Network Money Expert, and blogs at . You can also follow him on twitter at
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