Canadians under age 65 wanting to retire, worried re income
(Note: if you have other income, read the paragraphs near the end.)
As you know, everyone with certain residence in Canada (about 20 years) can qualify for Old Age Security at age 65. If one's income is over $60,000./year, approx., they begin to claw some back, at the rate of 15% ... and when one's income is over approx. $106,000., it is totally clawed back.
A number of financial advisors suggest that it might be wise for a number of potential retirees do so at 60 and apply for Canada Pension Plan, despite the one percent reduction per two months that one retires prior to age 65 (6%/year; 30% if begin to collect at age 60).
Many say that should one choose to invest the money and die before about age 80, that one is a net gainer.
But let's assume that you'd like to delay collecting C.P.P. till age 65, when O.A.S. starts.
However, one does not need to begin to collect until age 69 - 70, and there's a 6% increase per year for each year that one delays drawing past age 65.
If one chooses not to begin drawing C.P.P. until age 65, when O.A.S. starts, what can one live on in the meantime?
Would you like to know a way that some Canadians can receive an annual income of $46,345.00 (2006) (1) - probably over $47,000. now - before one develops one cent of income tax liability?
You can understand that the Government of Canada isn't going to let just any Tom, Dick, Harry ... or Jane ... qualify for such a lovely deal: it has to be for the select few, right? If it were available to the millions ... soon the government would be broke ... and we can't have that, now, can we?
There has to be some provisos, of course ... and there are three:
1. The "taxpayer" must have a substantial amount of investable assets (probably a minimum $2 million ordinarily, but even possible with a million or so, currently, but more likely an amount up to $5 million or so in ordinary times,
2. The "taxpayer" must have only one kind of income, and
3. The "taxpayer" can't work!
When one earns employment income, or the pension that may result for some workers (for substantially fewer people, in recent years), or interest on money loaned out ... one pays tax at top rate on such income.
But if one owns Canadian stocks that pay a dividend, tax was assessed on those dividends at a low rate until 2005 ... and if one had no income from any source other than such dividends at that time, one didn't have to pay tax until those earnings reached about $28,000. - 30,000. up to 2005.
In 2006, they changed the way that they calculate the tax level on such dividends, such that if the only income that one has is dividends from such Canadian stocks, there was no tax to pay until one's income level was $46,345.00.00 (1).
Probably the initial tax-free rate has passed $47,000. by now.
If one has a spouse with low income, allowing for transfer of some spousal credits, that tax-free amount goes higher.
Same if one makes substantial charitable contributions ... more if one makes political contributions ... or has substantial eligible medical expenses.
And, as you know, there's been a decrease in price of Canadian bank shares for a couple of years, due to the involvement of some in the U.S. mortgage mess, plus folks being worried about banks in general and their share prices have dropped substantially, even though they are about the most secure in the industrialized world.
This has meant that their dividend rates are about 5.5% - 8.0% or so in recent times.
So ... if you have $700,000. invested, paying 6.8%, to produce $47,600.00 ... with no income tax liability ... does that sound like a nice income to finance your retirement, prior to applying for O.A.S. and C.P.P. at age 65 or so??
For those of you with other income, e.g. working stiffs, recipients of other pension or investment income, etc. the tax credit on Canadian dividends allows you to pay a much reduced rate of tax on dividends of Canadian stocks ... but you won't be able escape paying tax entirely, as referred to above.
If you put Canadian stocks into your RRSP ... you lose the tax advantage that I refer to here (as every dollar coming out of an RRSP is added to income ... and taxed at regular rate).
If you didn't know about this possibility before ... and you make use of it ... you owe me $10.00, O.K.?
Have yourselves a lovely spring, everyone.
P.S. When you sell stocks for more than you paid, you delay paying tax on the increase until you sell them ... which is a substantial portion of the benefit available in an RRSP ... but when you sell a stock, you get half of that capital gain tax-free ... and when you take money out of your RRSP/RRIF - every dollar added into income and taxed at marginal rate.
If you borrow to buy investments to put into RRSP - interest not deductible. If you borrow to buy investments outside of RRSP - interest is deductible: big difference!
1. See "Canadian MoneySaver" magazine, July/August 2007 edition, p. 37, available in many libraries ... or "The Little Tax Fact Book" by Ed. Arbuckle.