an eye on retirement: wealth creation and … · -periodic rpp payments-successor annuitant rrif...

AN EYE ON RETIREMENT:Wealth Creation and Preservation

Wilmot George, CFP, TEP, CLU, CHS

Vice President, Tax, Retirement and Estate Planning

Agenda

• Canada’s retirement landscape

• Canada’s retirement incomelandscape– Government benefits

(OAS/CPP/QPP)

– Employer-sponsored benefits

– Personal savings

• Death and taxes

Canada’s retirement landscape1

• 6.4 million retired or semi-retired people in Canada– 1/5th of overall population

• 46% controlled circumstances surrounding retirement; 54% did not– 48% retired earlier, 6% later, due to circumstances beyond their control

• 48% of retirees worried about outliving their income; 74% of those still working have the same worry

• Average retirement age is 63– Trending upward – 62.1 in 2010

1Source: Angus Reid Institute; 2015 survey of 1,927 Canadian adults

Affordability of a Canadian retirement1

62% of retirees do not have enough money for extras or struggle to make ends meet


Retirement funding1

“A government pension is a primary source of retirement income for two-thirds (67%) of those struggling to make ends meet…1”

“[Registered and non-registered investments] were cited much less often by the struggling group, who were more likely to say they have downsized…or used other means…to support themselves in retirement.1”


Canada’s retirement income landscape

• Government-sponsored

• Employer-sponsored

• Personal savings and other

Government benefits

Source: The Pension Puzzle, 3rd Edition

Old age security (OAS) – Facts and figures1

Basic Pension

Covers Citizens and residents; age 65+

Maximum monthly pension (2018) $587

Taxable? Yes

Indexed for inflation? Yes

Earliest eligibility age 65

Income reduction threshold (2018) $75,910; full elimination at $122,843

1Current to March 2018

OAS/GIS – Recent changes

• Age of eligibility

– Effective April 2023, age of eligibility was to increase to 67

– New Liberal government not in favour of this change; returned eligibility to age 65

• Option to defer

– Can defer take-up for up to 5 years

– Deferred pension means increased benefits in future

– GIS benefits not eligible for actuarial adjustment

When to take OAS – Factors to consider

• LIFE EXPECTANCY

– General rule of thumb: Shorter – take early; longer – take later

• DO YOU NEED THE CASH?

– Still working/investment or rental

income/employer pension payments

• WHAT WILL YOU DO WITH THE PAYMENTS?

– Consume or invest? Can you earn a better return investing personally?

• VIEW OF OAS PROGRAM

– Will it be there when you need it?

Important: One size

does not fit all.

Canadians should

work with a

financial advisor to

determine most

suitable options.

Beware OAS clawbacks

• OAS benefits reduced, subject to income

• Reduction threshold:

– $75,910 – $122,8431

• Clawback rate: 15%

• Example ($85k net income):

=($85,000 – $75,910) X 15%

=$1,364/year or $114/month1Current to March 2018

Tips for avoiding OAS clawback

• Defer OAS take-up

• T-Class mutual funds

• Try capital gains instead of dividends (eg.corporate class)

• Keep debt to a minimum; less $$$ needed to fund debt

• Consider spousal RRSPs for future income-splitting

• Consider C/QPP sharing and pension income-splitting

• As you age, consider gifting

Split eligible pension income1

• Up to 50% of eligible pension income can be split between spouses or common-law partners

• Form T1032 “Joint Election to Split Pension Income”

• Eligible pension income?

– Income eligible for the pension income credit

Any Age Age 65 or older

-Periodic RPP payments

-Successor annuitant RRIF payments

-RRIF payments

-LIF/LRIF payments

-DPSP annuity payments2

-RRSP annuity payments2

-Non-registered annuity income2

1Federal rules. Some differences for Quebec tax purposes 2Splitable at any age if received due to spouse’s death

Splitting eligible pension income– Example: Pierre and Margaret

Without pension-splitting

Pierre

Eligible pension income $60,000

Tax @ 30%1 $18,000

Margaret

Eligible pension income $0

Tax @ 15%1 $0

Total tax paid $18,000

Tax Savings

1Tax rates assumed; assumes Pierre and Margaret have other income in addition to eligible pension income

Splitting eligible pension income– Example: Pierre and Margaret

Without pension-splitting With pension-splitting

Pierre

Eligible pension income $60,000 $30,000

Tax @ 30%1 $18,000 $9,000

Margaret

Eligible pension income $0 $30,000

Tax @ 15%1 $0 $4,500

Total tax paid $18,000 $13,500

Tax Savings $4,500

1Tax rates assumed; assumes Pierre and Margaret have other income in addition to eligible pension income

CPP/QPP – Facts and figures1

CPP (2018) QPP (2018)

Year’s maximum pensionable earnings (YMPE)

$55,900 $55,900

Year’s basic exemption $3,500 $3,500

Employee/employer maximum premium (4.95%) $2,594 (5.40%) $2,830

Self-employed maximum premium (9.90%) $5,188 (10.80%) $5,659

Monthly Maximum

Retirement benefit (at age 65) $1,134 $1,134

Disability benefit $1,336 $1,336

Death benefit $2,5002 $2,5002

1Current to March 2018; 2One-time payment

CPP – recent changes

• Elimination of work cessation test

• Introduction of post-retirement benefit1

• Change to pre-/post-65 take-up

• Enhanced general drop-out provision2

• Retirement savings reform

1For working pensioners; mandatory from ages 60-64, optional thereafter2From 15% to 17%

The debate – retirement savings reform

• Ongoing debate over retirement savings reform

• Previous federal government preferred voluntary options

– PRPP, TFSA, RRSP

• Some provinces preferred mandatory option; enhanced CPP

• May 2014: Ontario proposed Ontario Registered Pension Plan (ORPP); Feds criticized plan, said they would not co-operate1

• Oct 2015: Federal election – New government announced plan to consult on options

1In 2015 letter to Ontario government, federal government indicated that they would not co-operate with administration of ORPP

June 2016: Agreement reached to enhance CPP

Source: Department of Finance

Enhanced CPP – what are the details?

• Will replace 33% of pensionable earnings1 (instead of 25%)

• Pensionable earnings will increase to $87,200 by 2025 (instead of $55,900 currently)

• Premiums will increase by 1% for both employers and employees

• To offset cost to low-income workers WITB2 to be enhanced

• Tax deduction for enhanced portion of employee premiums

• Changes to be phased-in gradually beginning Jan 2019

1Pre-retirement pensionable earnings; 2Working Income Tax Benefit

Enhanced CPP – who will benefit?

• Young employees

– To earn full enhancement, person must contribute for 40 years beginning in 20251

– Others will benefit to a lesser extent depending on age

• Ontarians

– An enhanced CPP will be simpler to introduce and administer than an all-new Ontario pension plan

– With CPP enhancement, ORPP will not proceed

1After phase-in period

Enhanced CPP – what drove the changes?

• Inadequate retirement savings, particularly by younger middle-income earners

• New government, new approach

• Declining availability of traditional company pensions

• Potential launch of ORPP

CPP Changes – some support…

…and some critics

Registered pension plans – On the decline

• From 1997-2011, the proportion of employees covered by RPPs dropped by 11%1

• Only 38% of employees participate in a RPP1

• There is a growing disparity between workplace pension plans in the public and private sectors2

– # of workers with a pension plan: Public – 80% vs. Private – 25%

– Majority of pensioned employees (50.2%) are government workers

1Statistics Canada (2014); 2Globe and Mail (2011)

Registered pension plans – On the decline

Source: Statistics Canada – New facts on pension coverage in Canada (Dec 2014)

What about personal savings

Options for deploying personal savings:

• Annuity

• Guaranteed Minimum Withdrawal Benefits (GMWB)

• RRSP/RRIF/LIF income

• T-Class distributions

• Systematic Withdrawal Plans (SWPs)

• TFSA income

Personal savings –A look at the cash flow options

Annuity GMWB LIF/RRIF T-Class SWP TFSA

Guaranteed lifetime income

*

Flexible access to cash

Control over investments

Tax-efficiency (non-registered)

Availability of inheritance

*Subject to excess withdrawals

DEATH AND TAXES

Taxation at death – Income tax

• Non-registered assets (including real estate) “deemed disposed”– Difference between value and cost taxed as capital gain on final

tax return

• RRSPs and RRIFs also disposed– Fully taxed unless transferred to spouse or financially

dependent child/grandchild’s registered plan or annuity

Income tax – Ontario rates (2018)

2018 rates – Ontario; Source: Taxtips.ca

Taxation at death – Probate tax

• What is probate?

– Confirms executor authority to distribute estate assets

– May be required by asset administrator(s) to transfer estate assets; not required in all cases

– Granted by province upon application

– In Ontario, known as “Certificate of Appointment of Estate Trustee With (or Without) a Will”

– Appoints an administrator in the case of intestacy

– Fee levied by the courts for this process

Probate fee calculation – Ontario

Estate Value Probate Fee

< $50,000 0.50%

> $50,000 $250 + 1.5% of amounts in excess of $50,000

ExampleEstate value = $2,000,000Probate Fee = $250 + 1.5% of $1,950,000

= $29,500

Taxation of vacation properties

• Cottage cost = $400,000

• Renovations = $50,000

• ACB = $450,000

• FMV = $1,000,0003

Capital gains tax

= ($1,000,000 – $450,000) x 50% x 54%

= $148,500

Probate fee

=$250+(1.5% x $950,000)

=$14,500

Nathan1, a widower, has two children - Sandra (33) and

Kyle (27). He wishes to transfer his cottage2 at death.

1Ontario resident2No mortgage; Ontario property3Value at death

Tips for reducing tax payable

Talk To Your Financial Advisor!


• RRSP/RRIF income as determined by tax brackets

• “Crystallize” capital gains periodically

• Result: Reduces income in year of death – less tax at top marginal rate

Draw Income In Retirement Years

2018 rates – Ontario – Source: Taxtips.ca


Named Beneficiaries - RRSPs, RRIFs & Insurance Policies

• Reduces estate value for probate purposes

• Allows beneficiaries immediate access to funds

• Avoids complex estate settlements

• RRSPs/RRIFs left to spouse or minor children normally transferred tax-free1

• Where taxable, be mindful of tax on RRSP/RRIF– Estate liability

1When transferred to registered plans or certain annuities


Consider Joint Accounts

• Assets registered jointly typically bypass estate of the deceased – reduces probate tax

• Best used with spouses; can be used with adult children

• Capital gains tax can result when joint owners are added

• Good idea to document intent in “side document” to avoid conflict after death

Joint tenancy SNAFU…

Consider this:– Mary – Mother ($50,000 investment account)

– Beth – Daughter #1

– Kim – Daughter #2

– For convenience, account registered jointly (JTWROS) with Beth

Q: Who is right? Beth or Kim?

Presumptions of common law

• Under common law, generally two presumptions for gratuitous transfers:

• Presumption of Advancement (PA)

– Presumes individual making transfer intends to make a gift

– Spouse to spouse; parent to child

• Presumption of Resulting Trust (PRT)

– Presumes property is held by joint owner in-trust for estate

– Sibling to sibling; friend to friend, etc.

Supreme Court weighs in…

• Presumptions tested in Supreme Court in May 2007

• Court clarified use of presumptions

• Presumption of Advancement (PA)

– Spouse to spouse; parent to minor child

– Onus on estate to prove otherwise

• Presumption of Resulting Trust (PRT)

– Transfers between anyone else

– Onus on joint owner to prove otherwise

Back to our example…

• Under the new rules, Mary’s estate flowed through her estate and was subject to her will

– Divided between Beth and Kim

– Probate tax; legal fees; ongoing rift between siblings

• Why? Intention not clear

• Be sure to document intentions

– Deed of gift/Bare trust declaration

Tips for reducing tax payable – Charitable giving

• Tax credit for up to 75% of net income (up to 100% in year of death and year prior)

• ZERO capital gains tax on gifts of publicly traded securities to charity

• Example: Tax Credit Calculation (Ontario resident)

Donation $100,000

Federal and Ontario credits $40,1201

Total cost of gift $59,880

1Ignores 33% federal tax credit rate for gifts from income > $200K

Consider donations “in-kind”

• Justin holds CI Signature Canadian Balanced fund with a FMV of $50K; wants to make a $50K donation to charity

Cash donation

Market value $50,000

ACB ($20,000)

Capital gain $30,000

Taxable capital gain (50% vs 0%) $15,000

Tax on capital gain (at 50%) (A) ($7,500)

Tax benefit of gift (at 40%) (B) $20,000

Net tax benefit (A+B) $12,500

Consider donations “in-kind”

• Justin holds CI Signature Canadian Balanced fund with a FMV of $50K; wants to make a $50K donation to charity

Cash donation “In-kind” donation

Market value $50,000 $50,000

ACB ($20,000) ($20,000)

Capital gain $30,000 $30,000

Taxable capital gain (50% vs 0%) $15,000 $0

Tax on capital gain (at 50%) (A) ($7,500) $0

Tax benefit of gift (at 40%) (B) $20,000 $20,000

Net tax benefit (A+B) $12,500 $20,000

Net savings from donating in-kind $7,500

Tips for Reducing Tax Payable

Gift Assets Before Death

• Reduces value of estate subject to probate tax

• Ensures beneficiaries receive assets intended for them

• Reduces potential for conflict between estate beneficiaries

• Prior to death, future growth accrues to beneficiary instead of donor

• Note: Loss of control; possible taxation at time of gift

Life insurance as an estate planning tool

• Normally serves one of two purposes:

– Preserves an existing estate

– Creates an inheritance

• Can be used to:

– Pay off liabilities (including taxes)

– Establish a fund for ongoing income support

– Make a donation to charity

• To manage costs, best to acquire sooner than later

Thank you

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