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Canadians with major assets wanting to retire under 65

Posted by joyfulguy (My Page) on
Tue, Feb 6, 07 at 21:07

How'd you like to make about $40,000.00 per year - and pay not one cent of income tax?

Impossible?

Not at all.

There are, of course, some major provisos.

1. You must be wealthy.

2. You must have only one kind of income.

3. You can't work.

Well - if you feel that you should work, to pay your way in society, justify your existence, etc., fine - but don't take pay for it.

Quite a number of financial advisors suggest that a worker with major Canada Pension Plan credits built up take retirement at age 60, for, though they take a reduction in benefits of 6% annually for each year under 65, meaning 30% at age 60, they'll be ahead if they die before their early 80s. You only have a choice if you don't need the money. If you can invest that income and get a better than average rate of return on the asset, or arrange to be taxed at a lower than usual rate, you can push the break-even date higher.

It might be better for you to delay starting C.P.P., though.

If you've been resident in Canada for a substantial number of years, even SAHM Moms who've never been employed (outside the home for pay), you'll qualify for Old Age Security at age 65 - just over $470. per month, currently (partially indexed to inflation).

You won't want to forego receiving that, so you'll probably want to start C.P.P. at 65, as well.

If you have in the neighbourhood of a million invested, entirely in Canadian stocks, earning about 4%, that'll produce about $40,000.00 annually.

Income tax liability - $0.

If you have a spouse with under about $9,000. annual income, or make substantial charitable gifts, or make over 3% of net income in medical costs, the tax-free income can be substantially higher.

Don't believe me?

You got your 2006 tax form a while ago - get it out, write down 0 employment or other income, but $40,000. income as dividends from Canadian corporations ...

... and run the numbers.

You're in for a surprise, I'll bet.

You owe me $10.00. Just transfer it to my bank account - No. 123456, please.

Worth it, don't you think?

If you have employment or other income, the tax benefit still applies - but you won't be able to avoid paying income tax entirely.

Have a great week, everyone.

ole joyful


Follow-Up Postings:

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RE: Canadians with major assets wanting to retire under 65

Maybe a fund of about $1.333 million at about 3% would be a more feasible scenario.

Not providing for sale of some assets, rather probable in a 1.5 - 2 million or larger asset portfolio situation (some paying almost no dividends or none), which would result in capital gains/(losses) to relate to current income.

In earlier years, if one received $10,000. of dividends from Canadian Corporations, one added (Grossed-up) 25% to that figure to find the taxable amount of dividend income, to report $12,500. on the tax return. Then 13.333% of that amount, or Dividend Tax Credit of $1,666.63 was deducted from the tax that one owed. Non-refundable tax credits were available to most taxpayers, and those along with the dividend tax credits, allowed "taxpayers" with no other income to have about $27,000. solely dividend income to have nil tax to pay.

Now this situation is called "Ineligible dividends" and the ratios are as indicated above.

A new category of "Eligible dividends", which seems to include dividends paid by most stock-exchange-listed Canadian corporations, are grossed up by 45%, i.e. $10,000. cash is reported as $14,500. on the tax return - and have a Dividend Tax Credit of 18.9655% of the taxable amount, or $2,750. deducted from the tax owing. This, added to the Non-refundable tax credits, allows a "taxpayer" to have nearly $40,000. before becoming tax-liable.

Which may be pushed higher in various other circumstances that I think that I outlined above.

Most long-term Canadian residents, including non-employed people (e.g. housewives), qualify for Old Age Security at age 65 of about $5,800. annually. As this is a non-contributory Federal benefit, if the taxpayer's annual income is over about $55,000., part of that Old Age Security is clawed back by the gov't. The clawback amount increases, till the total amount of one's O.A.S. is clawed back when one's income is in the mid- to high $80,000.00s.

Cash dividend of $40,000. plus 45% becomes $58,000. on tax return, plus $5,800. O.A.S., close to $64,000. taxable, will result in substantial clawback of one's O.A.S. benefit. Plus reduction in senior's Age credit, which reduces with increased "income" - whether "real" or "imagined" income! "Gross", huh?

Canada Pension Plan (mandatory contributions by both employer and employee, therefore a contractual benefit) allows members who are "substantially retired" (rather loosely defined) to stop contributing and begin to claim benefits at any time between age 60 and 70, with 6% annual reduction if claimed under 65 and 6% annual addition if over 65. Taxable.

Private pension plan benefits are available to some people.

Benefits of up to $1,000. from private pension plan or RRIF payments qualify one for a non-refundable tax credit, dollar for dollar, up to $1,000.

If one is age 69, partial owner (the government being the other partial owner) of a tax-deferred retirement account (RRSP), it must be closed out by the end of that year - or the rules provide that it will be closed out as of Dec. 31 of that year and the total amount added to income in that year. Scarcely anyone chooses this route!!

Most personal money managers prefer to use the RRSP money:
1) to buy an annuity (not so hot an idea in these low-interest times), or
2) to roll over into a Registered Retirement Income Fund. With a RRIF, no more deposits allowed, and required to remove at least a given percentage annually, beginning at about 7.5% and rising to 20% annual withdrawal at age 90 and later.

Residue in a RRIF on owner's death: if no spouse, infant or disabled dependent kid is added to deceased's income in year of death, or can be fully transferred to one in spouse's name with no tax consequences - yet.

Residue is added to current income in year of surviving spouse's death.

Where these or other income situations are obtained, the tax reduction is still substantial - but one doesn't avoid tax entirely: one is then a taxpayer (no quotation marks)!

There are some other games that an astute portfolio manager can employ, if she/he is willing to a take some moderate short-term risks.

There are several fairly smart women in the monthly investment shareclub that I've attended for about 7 years.

Good wishes for wise and constructive use of retirement assets.

ole joyful


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RE: Canadians with major assets wanting to retire under 65

Don't know anything about Canadian investments. Aren't there triple tax free government bonds? Free Federal, Free Territory, Free City? Something along those lines?


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RE: Canadians with major assets wanting to retire under 65

Not much tax-free around here.

Actually, I suggested to some Canadians a while ago that they shoud contact their gov't guys/gals to recommend such as the U.S. tax-free munis, since we have so much infrastructure that needs replacing.

Dividends on Canadian stocks are taxed a lot lower than interest earnings - one of the major reasons that I don't like earning interest.

ole joyful


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RE: Canadians with major assets wanting to retire under 65

"Dividends on Canadian stocks are taxed a lot lower than interest earnings - one of the major reasons that I don't like earning interest."
____________________________________________

I heard about the high tax rates on a Canadian radio station AM740.ca. (My favorite station)

Canada has the right idea IMO. It really helps strengthen the country.

The U.S. eased up some years back on the taxes owed on qualified dividends. The qualified stocks in my portfolio are all utilities. Very little risk and generate income and some growth to offset inflation and taxes.


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RE: Canadians with major assets wanting to retire under 65

I heard from an accountant, whom I met about 7 years ago at an investment oriented group of about 20 that meets monthly, about this major tax-free income advantage that has experienced a major increase this year. Earlier he said that it grew from about $27,000. in 2005 to about $40,000., then later he said that it was closer to $50,000.

After a preliminary evaluation of my income tax the other evening, I did some calculations on this situation.

A single taxpayer under 65, no spouse with low income to provide greater tax credit, or charitable or political contributions, or medical costs greater than 4.45% of net income, can earn $49,850. - tax free.

I've done some preliminaries on a person under 65 with spouse with income under $710., no charitable or political contributions or medical expenses above 4.45% of net income. It looks as though the income solely as dividends from stocks in Canadian companies could be somewhere around $56,200. for him/her.

When one adds the "gross-up" of 45%, that's above $81,000. taxble income, which is close to the level at which the person over 65 who qualifies for (non-contributory) Old Age Security has almost all of it clawed back. When the "taxpayer" passes 65, that Old Age Security income will put the taxable income to over $86,000. - which will mean that s/he won't even bother applying for it (apart from some other possible means of alleviating the situation), for it would all be clawed back.

Hi New Jersey B T,

We don't have tax-fee munis up here.

Your reference to AM740 strikes a chord with me. It used to be the flagship station of the Canadian Broadcasting Corporation, our national broadcaster, before FM became so important, and which licence they gave up in order to obtain a number of FM station licences as repeater stations throughout Ontario.

The CBC is my favourite and one can view at www.cbc.ca an overview of their FM and AM services, plus their service on Sirius Satellite radio, and iPod, and their TV services across the country, as well.

Many U.S. people can find their radio service on Sirius Satellite Radio 137. Quite a number of people in the northern States listen to nearby CBC FM or AM stations.

I hope that you have an enjoyable spring week.

ole joyful


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RE: Canadians with major assets wanting to retire under 65

"I hope that you have an enjoyable spring week."

Why thank you! It is pretty rainy today and it might turn to snow this evening. It is a great day to do taxes as there is nothing else to do and they are due this Tuesday.

I am trying to use a tax preparation software package called "Tax Cut" by H&R Block. I can see that this software has limitations. My Sister got fined by the IRS one year due to their software bug.

I used to use the services of H&R Block itself but they messed up my taxes 3 years in a row. I had to go to a Certified Public Accountant to undo the damages which cost me an additional $300. The publicly traded limited partnership stocks that I owned, were way over the heads of the H&R Block "tax experts".


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RE: Canadians with major assets wanting to retire under 65

I'm nothing but an old fogey, I guess, as I do my taxes by hand.

I don't do the exotic investment stuff such as you refer to.

Have a report of distribution from a mutual fund co. to print off at the library this afternoon (don't have a printer at home).

Our taxes are due Apr. 30, and I'll have more to pay this year, as I got forced out of a couple of long-held stocks last year when the companies were sold. There'll be a tax load only on one, though, as I'm transferring the other to a charity, so I avoid tax liability on capital gains on it entirely.

We're enjoying bright sunshine and mild weather today. I need to do a wash, as I've been saving up, expecting decent weather to hang clothes on the line ... ran out of briefs, so had to buy some (I've been thinking for a while that it was about time).

Good wishes to you and yours.

ole joyful


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RE: Canadians with major assets wanting to retire under 65

I had a pleasant surprise, as the amount of the cheque that I had to write to the tax people at the end of April was small - less than $200.00.

I am required to make installment payments 4 times a year, which happens when one has over $2,000. tax to pay when sending in his/her return, which is the situation with most retirees.

I'm thinking of having some pension deducted at source, enough to bring the amount of tax that I must pay with the return down to $1,900. or so, thus avoiding the need to pay by instalments. As I am sometimes late paying them, and they charge interest ... and compound it daily, darn 'em!

So I was pleasantly surprised when it came time to write the cheque, this year.

Also, I thought that I'd be paying a higher proportion of my income to tax this year than the approx. 8.75% last year and a little over 10% 4 years ago, but, though I haven't calculated it exactly, it'll be about the same as last year, I think.

I hope that you're all enjoying this lovely spring weekend ... and that there isn't too much death and suffering in the town in NE? KS? that was hit by a tornado last night - swath about 1/2 mile wide, hitting downtown, destroying City Hall, they said.

ole joyful


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RE: Canadians with major assets wanting to retire under 65

Sinngle "taxpayer" 2006 income $46,345.00 ... income tax $00.00.

If there's a low-income spouse, or charitable or political contributions, or allowable medical expenses over about 4.5% of net income (more difficlt in Canada than in the U.S., I think) ...

... the tax-free amount goes even higher.

Up over 60% from that allowable in 2005.

See - the gov'mint takes care of their wealthy friends, on this side of the border, too!

ole joyful


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RE: Canadians with major assets wanting to retire under 65

Some Canadians who missed this thread before may find it useful.

ole joyful


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