Let’s start by talking about taxes on retirement income.
Retirement income begins for most with CPP (Canada Pension Plan). Benefits are tied to what the pensioner contributed during his or her working years.
It is not necessary for someone to have worked and contributed to CPP for the entire duration of his or her working years in order to receive the maximum benefit, however as a rule of thumb, the more a person contributed the higher the benefit will be.
Assuming a person is 60 or older and has retired from the workforce, he or she is eligible to begin collecting CPP. The longer you wait (to a maximum of age 70), the more you receive. In my experience, however, most who are eligible will choose early CPP, feeling that a bird in the hand is worth two in the bush. Even though CPP is considered fully taxable, if it were your only source of income, chances are you would be paying no taxes. That is because your income would fall below the basic personal exemption.
Then comes Old Age Security at age 65, which is payable in full to all Canadians who have spent at least 40 years in Canada. OAS is also fully taxable, and in this case there would likely be some tax payable as your basic personal exemption would be exhausted.
Then for many comes pension income, as well as RRIF income (from money contributed to an RRSP over the years). Once again, both are fully taxable.
When you consider that everything mentioned thus far is fully taxable, it becomes apparent why the issue of taxation of investment income is so important. Because it will be added to all of these income sources, and will be taxable at your marginal rate which could be as high as 43.7 per cent.
Then there is the issue of claw-back of your Old Age Security — whereby the government takes back what they have given you if your income is too high. Within a certain income range, interest earned on GICs, for example, will result in claw-back at a rate of 15 cents per dollar, with dividend income being more problematic due to the fact that it is grossed up when determining your taxable income.
So in the end, if your taxable income reaches a certain threshold, you will lose 43.7 per cent to income tax — plus an additional 15 per cent that your OAS is clawed back.
The dilemma facing retires is twofold: One, usually the safest forms of investment income also result in the least favourable tax treatment, and; two, not only is income tax a problem, there is also the issue of claw-back.
The Single Deposit Insured Annuity addresses both issues by providing a guaranteed income that receives far better tax treatment. It does so in two ways:
A Prescribed Annuity: an annuity that provides guaranteed lifetime income, of which only a portion is taxable, and
A Universal Life Insurance Policy: whereby investments held within the policy (within limits) are allowed to accumulate without attracting taxation, until ultimately paid out as a tax-free death benefit.
Effective? It definitely can be.
Please feel free to ask for a more detailed explanation.
Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). The views of the author do not necessarily reflect those of RJL. This article is for information only. Securities are offered through Raymond James Ltd., member CIPF. Financial planning and insurance are offered through Raymond James Financial Planning Ltd., which is not a member CIPF. For more information feel free to call Jim at 752-8184, or e-mail at email@example.com. and/or visit www.jimgrant.ca.