The OAS clawback ceiling isn’t as firm as you thought — and here’s how you can take advantage
There is a ceiling that many retirees reach when generating income from OAS accounts that can reach up to fifteen cents on the dollar in “clawback” or money owed in returns. There are ways however, that even those who have reached well above the ceiling can save some money. You could restructure your income flows or even create a larger ceiling with two withdrawals that are carefully timed. Also, if you don’t touch the money and want to leave it to your heirs, an estate planning option could give your heirs rights to the money if they apply for what was not withdrawn up to a year before you die.
“But what I never knew, and I’m sure many affluent Canadians might not realize, is that the OAS ceiling effectively rises for each year you choose to defer the commencement of benefits”
Avoiding tax is okay, but know the boundaries
Under Canadian law, there is legal precedent for being allowed to order your financial affairs in such a way to minimize or even eliminate any taxes you would otherwise owe. However, the government passed a law, called the General Anti Avoidance Rule (GAAR), as an attempt to draw a line between use and abuse of the tax code for this purpose. The line is simple; if the Canada Revenue Agency wants to object to your tax return, and how you have structured your finances for tax purposes, the GAAR legislation permits the CRA to take you to court for a judge to examine the matter.
Key Takeaways:
- One of the three conditions for the GAAR to apply is that there had to be a tax benefit. If you can demonstrate that you didn’t obtain any tax benefit, you could escape the GAAR.
- Second, the tax benefit you received had to result from a transaction, or series of transactions, where you were intending to avoid tax as a key motivator. If you can show another primary reason for the transaction(s), then GAAR might not apply.
- Third, the avoidance transaction had to be abusive.
“Make sure you’re aware of the three conditions for the GAAR to apply, to avoid a battle that you may have, at best, a 50/50 chance of winning.”
Why saving too much for retirement is just as risky as saving too little
The concept of retirement planning is to ensure that when you’re not working, and the flow of money coming in slows or stops entirely, your life doesn’t stop as well. Many focus on reducing, or even eliminating, the financial risk that might threaten their retirement portfolio. And while safeguarding your end of life nest egg is a laudable goal; it can be a bit too much of a good thing. Over saving, living so frugally that you might as well not even have money, can be just as bad as not planning at all for your golden years. Financial planners advise finding a balance, rather than an extreme.
“Only 20 per cent of 65-year old Canadians will live for 30 years — and that means their money will far outlive them.”
32% of Canadians don’t know difference between TFSA and RRSP, survey shows – BNNBloomberg.ca
When trying to figure out their financial planning for retirement, 69 percent of Canadians say they would choose a TFSA over an RRSP. However, there’s a problem. About a third of all Canadians don’t have the financial knowledge to be able to distinguish between them. A TFSA is a savings account where investment income is tax-free. Whereas, an RRSP is a tax-deferred retirement savings account with contributions that are tax deductible.
“Most Canadians prefer to tuck their money into a tax-free savings account over a registered retirement savings plan, but nearly one-third of respondents don’t know the difference between the two.”
The best way to transfer investments to your spouse
There are tax implications when transferring investments to your spouse. A straight transfer of a capital asset doesn’t mean the capital gains are also transferred, and the taxes on the capital gain or dividend would still be your responsibility. Depending on your goals for transferring investments, there are a number of ways to do it. For instance, if you want to avoid future taxes, consider loaning the funds to your spouse at the minimum prescribed interest rate, which is currently 2 percent If you have a large amount invested, you can even make the loan to a family trust that you run with many beneficiaries.
Key Takeaways:
- Transferring mutual funds or stocks can be done on an adjusted cost base and the current fair market value (FMV).
- Transfering into a spouse’s RRSP or TSFA ensures subsequent income, and withdrawals will not be taxed back to the giver, but it also means the giver will need to claim a capital gain at the time of transfer due to it being deemed a disposition.
- Using a spousal loan allows future income to be generated in the name of a spouse. The interest paid would be tax deductible by your spouse and taxable to the spouse loaning the money. There may still be deferred capital gains unless you sell it first to transfer the cash, or elect to claim it on your tax return at fair market value.
“A transfer of capital assets leads to attribution between spouses, such that any subsequent income – whether dividends, interest, capital gains, or other income – are taxable back to you.”
Loan interest is still deductible on your tax return, even if your investment or business goes belly up
There is a little known rule in Canadian Law that allows one to deduct loan interest even if the entity that received the loan money goes bankrupt or doesn’t exist anymore. This could be either an investment or a business. This rule has been part of the Income Tax Act since 1994. The rule essentially allows one to continue to write off interest payments well after the underlying business has ceased to exist. In a recent case, a judge referred to the loss of source rule, which stated that the deductible interest expenses from outstanding borrowed money when a business ceases operating “shall be deemed to be used by the taxpayer at any subsequent time for the purpose of earning income from the business.”
“Little-known ‘loss of source’ rule permits you to keep writing off previously deductible interest expenses after the source is gone.”
Have foreign property? The CRA issues harsh penalties if you don’t file this form
If you own foreign property, in most cases, you will need to fill out the Foreign Income Verification Statement Form (T1135) if the value of the property exceeds $100,000 (at any point during the tax year in question). If you do not do so, the CRA may issue harsh penalties. Failure-to-file charges are $25 for each day the form is late, up to a maximum of $2,500 per tax year, plus non-deductible arrears interest. The T1135 is not well-known. Nevertheless, there are numerous cases of otherwise diligent taxpayers getting hit with excessive fines for not filing it.
“When we think of foreign property, our minds may turn to that offshore Swiss bank account or, perhaps, a Florida rental property. But, believe it or not, a T1135 must be filed if you own foreign stocks, such as Apple Corp., Ford Motor Co. or Bank of America, in your Canadian, non-registered brokerage account.”
Tax tip – Warning: Buyer beware when it comes to Health Spending Accounts
Canada Revenue Agency (CRA) is cautioning business about Health Spending Accounts (HSA) tax schemes. In particular, they are warning people to be aware of invalid HSA deductions. Any business that is incorporated can offer this plan to their employees and shareholders so long as the latter also earns a T4 income. A sole proprietorship is not eligible for this type of plan because they don’t have any arm’s-length employees. If you’re unsure, be sure to get a second opinion from a tax professional.
Key Takeaways:
- HSAs are self-insured health plans offered by employers for their employees who live in Canada. They provide a way for small businesses to provide tax-free health and dental benefits to their employees (and their employees’ family members).
- Corporations with as few as one employee are eligible, as well as exclusively for shareholders in the company provided they are employees earning a T4 income.
- Owners and their employees of unincorporated businesses or sole proprietors are also eligible if the owner has at least one arm’s-length employee.
“A valid HSA plan must conform to private health service plan rules set out in the Income Tax Act.”
A primer on keeping your tax records
Just because you’ve filed your tax return doesn’t mean you’re over and done with the process. Everyone who pays taxes in Canada has a legal obligation to retain records relating to their tax return for six years. This means that the 2018 tax year records should be kept until the end of 2024. For business and individuals, all your records and receipts related to your taxes should be filed and maintained for that length of time, so that they’re available in case the Canada Revenue Agency requests any additional information. Don’t get caught off guard; keep those records and stay prepared.
“After you’ve filed your tax return, the story isn’t quite over because you have obligations to keep tax records for some time – although many people don’t.”
How to renegotiate your pay and treat your career as a financial asset – BNNBloomberg.ca
Financial planning needs to go beyond your investments and should be focused on the source of financing these investments, your job. Negotiating a salary before you even begin working could cost you a million dollars over time. When you have been with a company for a while, you need to be strategic when asking for a raise. Make sure you go to your bosses informed about your situation and the company’s situation to get the raise you deserve, which in turn can go towards your investments.
“The average Canadian will earn some $2 million over a 40-year working life, but not many of us think of our jobs as multi-million dollar investments.”