Withholding taxes are unavoidable in your working years since, for most employees, they’re automatically deducted every pay period. Being retired doesn’t exclude you from making remittances to the Canada Revenue Agency (CRA) on your retirement income, but there are more choices of how and when to pay the CRA that can impact your lifestyle.
Experts say the key is having a withdrawal strategy that considers your different retirement income sources and their tax rates, to keep more money in your pocket.
“You really have to think about cash flow planning when going into retirement, and where you’re going to draw from, to make sure you can pay your bills every month,” says Allison Marshall, vice-president of financial advisory support at RBC Wealth Management in Toronto.
“It takes a bit of thinking through when looking at sources that, while perhaps taxable, you may be better off withdrawing from based on the overall picture.”
Figuring out what to withdraw, and when, is a challenge for many Canadians. A 2019 CIBC poll shows 89 per cent of Canadians surveyed don’t fully understand how their retirement income is taxed. Nearly one-fifth of respondents believed the Canada Pension Plan (CPP) is a tax-free benefit.
Like employment income, most retirement income is taxable, including the CPP, Old Age Security (OAS) and company pension payments as well as registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs). With some retirement income, such as CPP and OAS, taxes aren’t automatically deducted with each payment, although it’s an option you can ask for to smooth out your finances and avoid a big year-end tax bill, which some experts recommend. Taxes are automatically withheld, however, on RRSP withdrawals, workplace pension income, annuity payments and, in some instances, on other sources — often causing some trepidation among new retirees.
“Clients often have an aversion to withholding tax, and that sometimes leads to an even bigger surprise when filing a return,” Ms. Marshall says. Joel Schlesinger reports.
Year-end strategies for seniors to avoid bigger tax bills
Tim Cestnick’s grandfather used to say that you know you’re getting old when everything hurts, and what doesn’t hurt doesn’t work.
“But just because you’re getting older doesn’t mean that your tax bill needs to hurt,” he writes in his latest Tax Matters column for the Globe.
In this article, he looks at year-end ideas that can put more money in your pocket.
Can this couple buy a home if the wife doesn’t find a higher-paying job?
At age 68 with little in the way of pension income, Felix is a worried man. His wife Maya is only 42, a newcomer to Canada who has yet to find work in her own field. Together, they bring in $57,940 a year in pension and employment income.
Felix says they could get by with what they have, helped by the dividends from his investment portfolio. He has roughly $120,000 worth of dividend-paying stocks in his taxable account and more than $100,000 in his tax-free savings account. There is $300,000 in his registered retirement savings plan.
They are renting now in Toronto but they’d like to buy a place of their own. “In the ideal situation, we would like to buy a small condo downtown for around $650,000 to $700,000,” Felix writes in an e-mail.
“In the worst-case scenario, if my wife does not get a job in her own field, how long before my savings run out?” Felix asks. Maya is working in a temporary job grossing $35,000 a year “but this is not what she wants to do.” If she found a suitable job, she could earn $50,000 a year, he says.
Felix is concerned about the longer term as well. “If I die, say, by age 80 or 90, will my wife be able to survive on the balance of my savings?”
In the latest Financial Facelift column, Amit Goel, a financial planner and portfolio manager at Hillsdale Investment Management Inc. in Toronto, looks at their situation.
In case you missed it
How to keep the peace when travelling with adult kids and grandkids
Travel consultant Marcia Proctor is suddenly getting a lot of calls from families looking to book intergenerational vacations. For example, she recently organized a February getaway to the Dominican Republic for three families travelling together – each including grandparents, parents and kids.
“It’s a multi-family reunion,” she says.
After more than a year and a half with very few bookings due to the pandemic, Ms. Proctor, of Travel Agent Next Door Inc. in Toronto, is seeing many grandparents looking to travel with their adult children and grandchildren. Many want a respite from the isolation and loneliness from the past 19 months of pandemic restrictions and feel a need to reconnect with grandchildren they’ve watched grow up on Zoom calls.
According to Kiran Pure, a registered child psychologist from Dartmouth, N.S, multigenerational trips can be psychologically healing for seniors. “Travelling with grandkids is valuable to build connection and continuity in the relationship through shared quality time together,” Dr. Pure tells Anna Sharratt in this article.
How to say no to adult children who ask for money
It’s always hard to say “no” to your kids, from when they’re little and want one more bedtime story to when they’re adults looking for help to pay the rent, buy a car or purchase their first home.
With less job stability, the rising cost of living and skyrocketing rent and housing prices, it’s no wonder so many millennials and Gen Z adults are turning to the ‘bank of mom and dad’ for financial support.
A recent CIBC survey shows parents are giving their kids larger financial gifts to buy the first home, or an average of about $82,000 in 2020, up from $52,500 in 2015. Also, about 30 per cent of first-time buyers got help from parents last year, up from around 20 per cent five years earlier, the survey shows.
“People have a hard time saying ‘no’ to their kids,” especially as they point out the challenges they’re facing today, says Julia Chung, a senior financial planner with Spring Planning in Vancouver.
It’s not an issue, Ms. Chung says, unless it puts parents’ retirement and financial security at risk.
Ms. Chung has had clients who gave money to their adult kids and then ran into financial trouble in their retirement, despite her best efforts to show them the risks of doling out the cash.
“There’s only so much anybody can do,” Ms. Chung says. Gillian Livingston reports.
What else we’re reading
How vulnerable is your retirement to high inflation?
Deep in the fine print describing retirement in the pre-pandemic world was some language about inflation being one of the risks to your financial well-being, writes the Globe’s personal finance columnist Rob Carrick.
He notes that, with living costs up an average 1.8 per cent over the previous three decades, inflation seemed a spent force.
After clocking in at 4.4 per cent in September, inflation is back as a retirement risk. But not everyone experiences higher living costs the same way after leaving the work force. In a world of rising inflation, some retirees are more vulnerable than others.
Read Mr. Carrick’s article about how inflation impacts your retirement income.
Vancouver clockmaker eyes retirement as the clock counts down on daylight saving time
Every year, horologist Raymond Saunders keeps the hands moving on Vancouver’s street clocks. As CBC reported recently, Saunders has been building and servicing outdoor clocks in B.C. and around the world for over 40 years, but it’s the steam clock in Vancouver’s Gastown neighbourhood, built in the 1970s, for which he’s best known.
Each year he repeats his daylight saving time ritual: he shuts off each clock for an hour, goes for lunch at a nearby restaurant, then turns the clock back on an hour later. He does the same set of tasks for the street clocks in other Vancouver neighbourhoods. “Falling back takes the most time. Because you’ve got to shut the clock off for an hour and come back and turn it back on,” he said.
At 81, he has been slowly passing his skills on to others, including his son-in-law. “It’s a shame that it’s a dying trade and no one is really learning the trade,” he said. “I’ve been on my own all my life, fixing clocks.” As governments on the West Coast consider moving to permanent daylight time, Saunders says he’s looking forward to letting go of this part of his job and focusing more on his passion for vintage clocks.
Ask Sixty Five
My question concerns the disposition of our jointly owned high-value home upon the death of the surviving partner. This is a second marriage so two respective families are named in our wills. Placing the house in a trust could ensure the intended equal family split; what if the surviving partner needs to sell the home for example to downsize or pay for care? Would the trust prevent this?
We asked Nicole Ewing, director, tax and estate planning at TD Wealth Advisory Services to answer this one:
Transferring the family home to a trust may indeed lead to unintended results if not carefully drafted.
Trusts are legal relationships between the settlors, beneficiaries, and trustees. Access to trust property is governed by the terms of the trust as administered by the trustees. Trusts can be very prescriptive, specifying precise amounts and timing of access to income and capital distributions, or they can provide broad discretion to the trustees to determine if, when, and to which of the beneficiaries the trust property will be made available. If the intent is for the surviving spouse to have (or not have) the right to sell the property if needed or desired, the terms of the trust should explicitly state as much.
Another important consideration is who you name as trustee(s). If a trustee is a current or future beneficiary, they may have a potential conflict of interest when exercising discretion between doing what is best for the survivor (perhaps depleting the funds entirely for his or her care) and what is best for the future beneficiaries (preserving the trust property).
Also consider that since 2017, only certain types of trusts are able to designate a property as a principal residence for the purposes of the principal residence exemption. A “lifetime-benefit trust” is one such type and can designate a property provided it meets defined criteria. If the trust does not qualify, any accrued gain on the property will be exposed to capital gains tax at the prevailing rates. If either spouse is a U.S. person, the U.S. tax rules should also be carefully considered as trusts are treated differently for Canadian and US tax purposes.
Trusts are excellent estate planning tools, but there may be alternate and complementary solutions that provide a better outcome. Consider putting in place a joint-first-to-die life insurance policy (possibly payable to the trust) to provide liquidity for the care of the surviving spouse and the ongoing maintenance of the home. A joint-last-to-die policy could also be used to fund an equal inheritance to the two families without fear the estate will be wholly depleted by the surviving spouse.
If you are considering using a trust, be sure its terms and intent are coordinated with existing marriage or cohabitation agreements, wills, and powers of attorneys. A wholistic approach that contemplates not just your home but all of your assets, as well as your goals and personal circumstances is essential. Your team of wealth, tax, and legal advisors can work together to help you understand your holistic financial plan and guide you through the process.
Have a question about money or lifestyle topics for seniors, or want to suggest a story idea for the Sixty Five series? Please email us at email@example.com and we will find experts and answer your questions in future newsletters.
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