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Tag: CPP

  • Young Canadians sue CPP Investments over climate risks – MoneySense

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    The four allege in a lawsuit filed in the Ontario Superior Court of Justice on Monday that the investment manager for the Canada Pension Plan is breaching its duty to invest in their best interest, and subjecting their contributions to undue risk of loss by its approach. “I do not want to be suing my pension manager, but I want to retire on a stable pension into a livable future,” said 20-year-old Aliya Hirji, one of the four plaintiffs, at a news conference in Toronto.

    CPP faces lawsuit on fossil fuel ties

    The lawsuit, filed with the support of Ecojustice and Goldblatt Partners LLP, claims CPP Investments is drastically underestimating the financial implications of climate change, as well as worsening its harms by continuing to invest in the expansion of fossil fuel production.

    Karine Peloffy, a lawyer and sustainable finance lead at Ecojustice, said the lawsuit will be a legal test on how the fund should approach climate risks, given its obligations. “It is the first time in any court anywhere that future beneficiaries will argue that one of the largest investors is breaching its duty of intergenerational equity,” Peloffy said.

    CPP Investments spokesman Michel Leduc said the fund will address the matter through the courts, if necessary, but that it has a rigorous approach to integrating climate risk as one of many material factors it considers. “Our focus remains steadfast on integrating climate-related considerations into our investment activity,” he said.

    CPP drops net-zero target but defends approach

    The lawsuit comes after CPP Investments quietly dropped its 2050 net-zero target for carbon emissions earlier this year, but Leduc said the change in language didn’t change the fund’s focus on climate change. He said climate risks are one of many risk areas the fund has to manage as it invests to maximize long-term investment returns without undue risk.

    Leduc said the fund will push back against efforts that it sees as limiting its ability to meet those obligations. “An action against CPP Investments, and our efforts to maintain the sustainability of the Canada Pension Plan, is an action against the retirement security of 22 million Canadians,” Leduc said.

    Travis Olson, another one of the plaintiffs, said Monday that he doesn’t believe it is meeting those obligations when managing investments the fund will one day rely on to help pay his benefits in retirement.

    “My pension manager’s practices are incompatible with an economically stable, climate-safe future that my generation is relying on,” the 22-year-old Olson said. “I’m looking forward to the day our pension manager stops betting against the world my generation will inherit, and until they do so voluntarily, we’re asking the courts to step in and protect our contributions.”

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  • Young Canadians sue CPP Investments over climate risks – MoneySense

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    The four allege in a lawsuit filed in the Ontario Superior Court of Justice on Monday that the investment manager for the Canada Pension Plan is breaching its duty to invest in their best interest, and subjecting their contributions to undue risk of loss by its approach. “I do not want to be suing my pension manager, but I want to retire on a stable pension into a livable future,” said 20-year-old Aliya Hirji, one of the four plaintiffs, at a news conference in Toronto.

    CPP faces lawsuit on fossil fuel ties

    The lawsuit, filed with the support of Ecojustice and Goldblatt Partners LLP, claims CPP Investments is drastically underestimating the financial implications of climate change, as well as worsening its harms by continuing to invest in the expansion of fossil fuel production.

    Karine Peloffy, a lawyer and sustainable finance lead at Ecojustice, said the lawsuit will be a legal test on how the fund should approach climate risks, given its obligations. “It is the first time in any court anywhere that future beneficiaries will argue that one of the largest investors is breaching its duty of intergenerational equity,” Peloffy said.

    CPP Investments spokesman Michel Leduc said the fund will address the matter through the courts, if necessary, but that it has a rigorous approach to integrating climate risk as one of many material factors it considers. “Our focus remains steadfast on integrating climate-related considerations into our investment activity,” he said.

    CPP drops net-zero target but defends approach

    The lawsuit comes after CPP Investments quietly dropped its 2050 net-zero target for carbon emissions earlier this year, but Leduc said the change in language didn’t change the fund’s focus on climate change. He said climate risks are one of many risk areas the fund has to manage as it invests to maximize long-term investment returns without undue risk.

    Leduc said the fund will push back against efforts that it sees as limiting its ability to meet those obligations. “An action against CPP Investments, and our efforts to maintain the sustainability of the Canada Pension Plan, is an action against the retirement security of 22 million Canadians,” Leduc said.

    Travis Olson, another one of the plaintiffs, said Monday that he doesn’t believe it is meeting those obligations when managing investments the fund will one day rely on to help pay his benefits in retirement.

    “My pension manager’s practices are incompatible with an economically stable, climate-safe future that my generation is relying on,” the 22-year-old Olson said. “I’m looking forward to the day our pension manager stops betting against the world my generation will inherit, and until they do so voluntarily, we’re asking the courts to step in and protect our contributions.”

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    About The Canadian Press


    About The Canadian Press

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  • How to bridge the gap until an inheritance – MoneySense

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    CPP/OAS strategy without other pensions

    You can begin your Canada Pension Plan (CPP) retirement pension as early as age 60 or defer it as late as age 70. For each month you defer it after age 60, the pension rises.

    If you start your pension at 60 and continue to work, you must continue to contribute to the pension until at least age 65. This will generally increase your pension, with an adjustment each year, but not as much as deferring it.

    Since you already started your CPP, there is not much of a strategy there, Esther. But for others reading along, a healthy senior who expects to live well into their 80s should strongly consider deferring the start of their pension. They will receive more cumulative CPP dollars if they live to their late 70s. Even after accounting for the time value of money from drawing down other investments, or not being able to receive and invest the payments, someone living to their mid-80s and beyond may be better off financially. 

    There is also the benefit of having more guaranteed income that is simple and indexed to inflation, providing cost of living and longevity protection—especially for someone without a defined benefit pension plan. 

    Although you plan to start your Old Age Security (OAS) at age 65, Esther, you may want to think twice about this for two reasons:

    1. The same logic as CPP applies. You can defer your OAS as late as age 70 and it, too, rises for each month of deferral. If you are healthy and expect an average or longer than average life expectancy, deferral may give you more lifetime retirement income, despite the temptation to have more cash flow today. 
    2. There is an OAS pension recovery tax if your income exceeds about $95,000 in 2026. If you are still working and receiving both CPP and OAS, you want to be careful about losing some of the OAS pension you are hoping to begin. This means-tested clawback of OAS is 15 cents on the dollar above that threshold, causing an effective tax rate of 43% to 52% and rising at $95,000 depending on your province or territory of residence. 

    Given your expected low income in retirement, it could be a costly decision to start OAS. There is also a low-income supplement called Guaranteed Income Supplement (GIS) that an OAS pensioner with a modest income may qualify for that could factor into your future income planning, Esther. 

    Compare the best RRSP rates in Canada

    Travelling in retirement

    Your plan to travel while you are young and healthy is an important reason not to work too long or wait to do things too late into your retirement. There needs to be a fine balance between saving for tomorrow and living for today—it is one of the biggest risks of retirement planning. 

    Conventional retirement planning methods focus on minimizing the risk of running out of money before you are 100, but this can also maximize the risk that you miss out on life experiences.

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    Counting on an inheritance

    You must be careful budgeting for an inheritance that could be lower than expected, and may come later than anticipated. It is a risky part of retirement planning even if you have full visibility about a parent’s finances. 

    The substantial nature of the inheritance you foresee, Esther, is an important factor in your own retirement planning. Given that you are 64, I assume your mother is well into her 80s or beyond. 

    In your case, the key to bridging the gap until that inheritance is definitely real estate. 

    Real estate strategy in retirement

    The benefit of owning vs. renting from a financial perspective is overblown, in my opinion. Until recently, real estate prices appreciated at an extraordinary pace in many Canadian cities, leading some to believe it is the key to wealth creation.

    Real estate should not be an investment, unless it is a rental property earning rental income. A principal residence should probably grow at slightly above the rate of inflation, in line with wage growth. Perhaps this is the reason prices have flatlined or declined recently. Although interest rates have risen, they have only gone up to normal levels, not extraordinarily high rates. 

    A discussion of real estate price appreciation often ignores property tax, maintenance, renovations, and interest costs, as well. 

    All that to say that selling and renting would not be a failure in this financial planner’s opinion, Esther. But you would want to consider an apartment or seniors’ community where you could live as long as you wanted, as opposed to a condo with a landlord that has risk with regards to being a long-term residence. Being forced to move in your 70s or 80s on 90 days’ notice may not be a good risk to take. 

    One solution you may not have considered is borrowing against your debt-free condo. You can apply for a mortgage or home-equity line of credit based on your income and qualifying ratios. A line of credit may be more flexible than a lump-sum mortgage deposited to your bank account, because you can withdraw funds as needed and pay interest as you borrow. 

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    Jason Heath, CFP

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  • What is the Canada Pension Plan death benefit? – MoneySense

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    There are several other programs that CPP contributors and family members are eligible for—including the CPP death benefit, Sam. 

    A Quebec resident may be entitled to Quebec Pension Plan (QPP) benefits. The CPP and QPP plans have coordination agreements since some Canadians contribute to both plans during their career.

    Other CPP/QPP programs

    Some of the other CPP/QPP benefits include: 

    • Disability benefits. These benefits are payable to eligible contributors who cannot work due to a disability. 
    • Survivor’s pension. If your spouse or common-law partner dies, you may be eligible to receive a survivor’s pension. 
    • Children’s benefits. A disabled or deceased contributor’s children under the age of 25 may be eligible to receive a monthly benefit. 

    What is the CPP/QPP death benefit?

    The CPP/QPP death benefit is payable to the estate or other eligible applicants on behalf of a deceased contributor. 

    The CPP death benefit is a one-time payment from Service Canada. Qualification requires one of the following minimum criteria to be met:

    • The deceased must have made contributions during at least one-third of the calendar years in their contributory period for the base CPP, but no less than 3 calendar years
    • The deceased must have contributed for at least 10 calendar years

    If the deceased was receiving a QPP retirement pension, last worked and contributed to the QPP, or lived in Quebec at the time of their death, an applicant must apply to Retraite Québec for a QPP death benefit instead of Service Canada for a CPP death benefit. 

    How much is the CPP/QPP death benefit?

    For many years, the maximum CPP death benefit was $2,500, but beginning January 1, 2025, there was an increase to the death benefit. It now consists of a basic amount of $2,500 and a possible top-up of $2,500, for a maximum $5,000 benefit. 

    The top-up is payable if the deceased met both of the following conditions:

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    • Had never received a CPP or QPP benefit based on their own contributions
    • Had no spouse or common-law partner eligible for a CPP survivor’s pension

    These amounts may decrease if a social security agreement is needed to meet eligibility for people who have lived outside of Canada and contributed to foreign social security plans.

    The maximum QPP death benefit remains at $2,500. 

    How to apply for the CPP/QPP death benefit

    You can apply online by signing into a My Service Canada Account (MSCA) and completing the online CPP Death Benefit form. You can also complete and submit the Application for CPP Death Benefit (form ISP1200) by mailing it to Service Canada. Quebec applicants can also apply online or by mail. 

    If there is an estate, the executor named in the will or the administrator appointed by the court must apply. 

    If there is no estate, or if the executor has not applied, there is an order of priority for applicants:

    1. The person (or institution) who paid for the deceased’s funeral expenses
    2. The surviving spouse or common-law partner
    3. The next-of-kin of the deceased.

    It generally takes between 6 and 12 weeks for the payment to be issued following receipt of the application by Service Canada or Retraite Québec. You should apply as soon as possible following a death. 

    Is the CPP/QPP death benefit taxable?

    The CPP/QPP death benefit is taxable. The income is reported on a T4A(P) tax slip, called Statement of Canada Pension Plan Benefits. QPP death benefits are reported on RL-2 slips for provincial tax purposes. 

    The death benefit payment may be reported by the estate of the deceased on a T3 Trust Income Tax and Information Return (Trust Income Tax Return TP-646-V in Quebec). If it is paid or made payable to a beneficiary, they report it on their T1 Income Tax and Benefit Return (TP1 Income Tax Return in Quebec). 

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    Jason Heath, CFP

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  • How to plan for taxes in retirement in Canada – MoneySense

    How to plan for taxes in retirement in Canada – MoneySense

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    The impact of your marginal tax rate

    It’s important to clarify, Ken, that if you have a minimum RRIF withdrawal with no tax withheld, that does not mean that income is tax-free. When you report your RRIF and other income sources on your tax return for the year, you may still owe tax.

    Canada has progressive tax rates so that higher levels of income are taxed at higher rates. For example, in Ontario, the first $12,000 or so you earn has no tax. The next roughly $3,000 has 15% tax. And the next $36,000 of income after that has about 20% tax. The type of income you earn may change these rates, as will tax deductions and credits. But if we kept going to higher incomes, there would be incremental increases in tax rates.

    If you have a higher income, your entire income is not taxed at the higher tax rate. Incremental tax rates lead to income being taxed at different rates as you move up through the tax brackets.

    This is why retirees tend to have tax owing. If you have a $10,000 pension, you may have no tax withheld at source. But if you have $60,000 of other income, you might owe 30% tax on that pension income.

    Getting ahead of tax installment requests

    If you owe more than $3,000 of tax in two consecutive years (or $1,800 in tax for two years in Quebec), the Canada Revenue Agency (CRA) (or Revenu Quebec) will start asking you to prepay your tax for the following year. This is called a quarterly income tax installment request.

    Installments—along with OAS clawbacks—tend to be the two cursed tax issues for retirees.

    You can reduce your installments by requesting higher withholding tax on your CPP, OAS, pension or RRSP/RRIF withdrawals, Ken. This optional tax withholding might be preferable if you would rather not owe tax or prefer to limit your installment requirements. If you can get your withholding tax rate estimated accurately, you may be able to better spend money coming into your bank account because it is all yours, and not accruing a tax liability.

    The choice is yours

    Many retirees do not have sufficient tax withheld by default. So, quarterly tax installments are common at that stage of life. But owing tax does not have to be a given if you prefer to increase your optional withholding tax.

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    Jason Heath, CFP

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  • What to do with a small pension in Canada – MoneySense

    What to do with a small pension in Canada – MoneySense

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    Many Canadian employers see DB plans, where retirees receive a guaranteed payout every month (sometimes indexed to inflation), as too expensive. And while the average time spent working for the same employer has actually risen over the last five decades, according to Statistics Canada data, spending a lifetime at one job—and collecting decades of pensionable earnings in the process—is a rarity these days. 

    “My dad worked for a bank for 35 years. That was the only job he ever had,” says Kenneth Doll, a fee-only Certified Financial Planner based in Calgary. “Those days are gone.” 

    Many Canadians must make do on partial pension coverage: either a small pension based on a decade or so of service, a defined (DC) contribution plan—where employers don’t provide backup funding if a plan underperforms—or a group registered retirement savings plan (RRSP), possibly with matching funding from their employer. Some Canadians don’t have a pension at all. “There is a massive decrease over the past 30 years in the number of defined-benefit pensions,” says Adam Chapman, financial planner and founder of YESmoney in London, Ont. 

    These pensions won’t pay all the bills like a traditional defined-benefit plan. So, what can people with insufficient pension coverage do? Ultimately, the answer lies in balancing the small (or not so small) guaranteed income from a pension and pushing the limits of other income streams. 

    How to plan your retirement now

    Every Canadian’s circumstances are different, and financial planners avoid speaking in generalities. But the earlier you start planning for retirement, the better. This applies whether you have nothing except the Canada Pension Plan (CPP) and Old Age Security (OAS), a DB plan indexed to inflation and guaranteed for life, or something in between. 

    First of all, sit down and figure out how much you plan to spend on life in retirement. Joseph Curry, a financial planner and president of Matthews Associates in Peterborough, Ont., says that when clients come to him, he maps out these details—as well as their expected income from CPP and OAS. All other income sources, including any pension income, are thrown in there, too. 

    “We have clients who would spend as little as, you know, $2,000 a month, all-inclusive,” Curry says. “And we have clients who would be spending in excess of $200,000 a year in retirement.” 

    One trick that works well is to max out any RRSP contribution room, then take the tax savings and throw them into a tax-free savings account (TFSA) for future retirement income. This can be tricky for Canadians with existing pensions, because their own and their employer’s pension contributions are deducted from their RRSP contribution room. For robust defined-benefit plans like the Ontario government’s Public Sector Pension Plan, it can remove thousands of dollars worth of contribution room a year. 

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    Brennan Doherty

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  • New to Canada and no pension: How to save for your retirement – MoneySense

    New to Canada and no pension: How to save for your retirement – MoneySense

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    The difficulties facing newcomers to Canada with respect to retirement planning are particularly acute. Given how Canada’s immigration points system works, economic immigrants are usually in their late 20s or early 30s—and they face unique challenges:

    1. Depleted savings: If you’re a 30-year-old newcomer, chances are you’ve used a large portion—if not all—of your savings to set up your new life in Canada. So, you’re behind in the retirement savings game. If retirement savings were a 100-metre race, lifelong Canadians have a 20- to 30-metre head start over newcomers.
    2. Lower income: If you’re a newcomer to Canada, you’ve probably had to restart your career a few rungs lower on the corporate ladder because of your lack of Canadian work experience. This means you’re not earning as much as others your age who have similar experience. Consequently, your ability to save for retirement is lower.
    3. Lack of knowledge: You need to understand Canada’s financial and tax systems to maximize its retirement planning opportunities, and gathering this knowledge takes time.
    4. Reduced contributions: Joining the Canadian workforce later in life than their Canadian-born peers, immigrants have fewer years to contribute to the Canada Pension Plan (CPP) and build up registered retirement savings plan (RRSP) and tax-free savings account (TFSA) contribution room. For this reason, they rely on less tax-efficient unregistered savings and investment vehicles to sustain their retirements to a greater degree than their neighbours.

    But there’s good news. As Toronto-based financial advisor Jason Pereira points out, “Canada’s retirement system does not discriminate against newcomers. The rules are the same for everybody.” So, with the right knowledge and expertise, you can work towards building a strong retirement plan. 

    How to start retirement planning as an immigrant

    To plan for retirement, you need to know:

    • How much money will you need each month in retirement? The simplest method to estimate your income requirement in retirement is to consider it to be 70% to 80% of your current income. For example, if you earn $75,000 a year today, 70% of that is $52,500—that’s $4,375 per month—in today’s dollars. Alternatively, you could estimate the amount you’d need in retirement using this tool.
    • How much you’ll receive from government pension and aid payments: You need to estimate approximately how much you’ll get from the Canada Pension Plan (CPP) and other government programs: Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). The tool at this link will help you do so. Ayana Forward, an Ottawa-based financial planner, notes that “some home countries for newcomers have social-security agreements with Canada, which can help newcomers reach the eligibility requirements for OAS.”
    • How much you’ll receive from your employer-sponsored retirement plan: Workplaces without a defined benefit pension plan sometimes offer a registered investment account (usually a group RRSP), with contributions made by you and your employer or only your employer. If you have a group RRSP from your employer, what will its estimated future value be at the time of your retirement? You could use a compound interest calculator to find out.
    • How to make up for a shortfall: The CPP, OAS, GIS and your group RRSP likely won’t be enough to fund your retirement. You’ll need to make up for the shortfall through your personal investments or additional sources of income.

    Sample retirement cash flow for a 35-year-old (retirement age 65)

    This table illustrates the types of income you could have in retirement. The amounts used in the table are hypothetical estimates. (To estimate your retirement income, try the various tools linked to above.)

    Amount (today’s value) Amount (inflation adjusted)
    A Amount needed $52,500 $127,400
    B Government pension and aid payouts
    (CPP, OAS, GIS)    		 $22,000 $53,400
    C Employer-sponsored pension plan
    (group RRSP)    		 $8,000 $19,400
    D B + C $30,000 $72,800
    E Shortfall (A – D) $22,500 $54,600
    F Needed value of investments in the year of retirement (E divided by 4%, based on the 4% rule) $562,500 $1,365,000
    G Needed flat/constant monthly investment amount from now to retirement $969

    In the example above, the person faces an annual shortfall of $22,500. In other words, this person needs to generate an additional $22,500 per year to meet their retirement income needs, after accounting for the typical government pension or aid payouts and their employer-sponsored retirement plan. To do this, they’d need to invest about $969 per month, assuming an 8% annual rate of return from now to retirement 30 years later. How could they fill this gap and meet their shortfall? Enter self-directed investments, real estate and small-business income.

    Build your own retirement portfolio

    An obvious and tax-efficient way to cover your retirement income shortfall is to build your own investment portfolio from which to draw income in your retirement years. These investments can be held in registered or non-registered accounts. Registered accounts, such as the TFSA and RRSP, offer useful tax advantages—such as a tax deduction and/or tax-free or tax-sheltered gains, depending on the account—but the amount you can contribute to these accounts is limited. Non-registered accounts have no contribution limits but offer no tax advantages. 

    Newcomers often have lower TFSA and RRSP contribution room compared to their peers because they’ve lived and worked in Canada for a shorter period. “TFSA contribution room starts accruing the year of becoming a resident of Canada,” Forward explains. “RRSP contribution room is based on earned income in the previous year.”

    Your TFSA and RRSP contribution room information is available on your Notice of Assessment from the Canada Revenue Agency, which you’ll receive after you file your tax return. To check your TFSA limit, you can also use a TFSA contribution room calculator.

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    Aditya Nain

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  • How to plan for retirement when you have no pension – MoneySense

    How to plan for retirement when you have no pension – MoneySense

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    Retirement

    OAS payment dates in 2024, and more to know about Old Age Security

    Here’s how Canada’s Old Age Security pension program works, who’s eligible for OAS, when you can start receiving OAS,…

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    Michael McCullough

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  • How to manage as a single parent with no pension – MoneySense

    How to manage as a single parent with no pension – MoneySense

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    “If someone’s not lucky enough to have a company pension, it’s that much more crucial for them to be building up savings on their own,” says Millie Gormely, a Certified Financial Planner at IG Wealth Management in Thunder Bay, Ont. “But that’s really hard to do when you’re supporting yourself and your kids, because you’re having to stretch that income that much further.”

    As of 2022, there were about 1.84 million single-parent families in Canada, and they face unique financial challenges. For starters, the primary caregiver may be covering more than their share of the responsibility and cost of raising their kids, footing bills for everything from food to clothing and childcare. And, thanks to inflation, we all know the cost of living has gone way up in recent years. Plus, a single parent may also be shouldering the burden of saving for their kids’ education (read about RESP planning), taking on medical expenses and more. And then there’s the fact that single parents tend to have less income to work with in the first place. According to Statistics Canada, lone-parent families with two kids report an average household income that’s only about a third of what dual-earner families of four bring in. (Not half, a third.) 

    All this financial strain can be a serious hurdle to retirement planning, but it doesn’t mean it’s impossible to save for your future. 

    Pinpoint your goals

    The first step is to identify your long-term goals (consulting a financial planner can help with this part). You’ll want to figure out your desired income in retirement and how much saving you’ll need to do to reach your goal. The next step is to take a hard look at your spending habits and your budget to find funds you can set aside for your retirement. 

    You may wish to review past bank and credit card statements to get a clear picture of what you’re spending on essentials (which can include rent, groceries, transportation and daycare). You’ll also want to get a clear picture of your debts like credit card balances, personal lines of credit and mortgage instalments to help you identify your fixed costs. All of this will help you figure out a budget you can live with—and what you have left over for retirement savings.

    If what’s left isn’t much, don’t despair. Even a small monthly savings will help you in the long run, says Gormely. “Contributing something rather than nothing on a regular basis is going to put you so much further ahead than if you just throw up your hands,” she says.

    Assess potential sources of retirement income

    You may have more options than you realize. A registered retirement savings plan (RRSP) is a long-term investing account that is registered with the Canadian federal government and helps you save for retirement on a tax-deferred basis. It allows for plenty of room to help your money grow. For example, your RRSP contribution limit for 2024 is equal to 18% of your 2023 earned income (or $31,560, whichever is lower). You also can tap into unused contribution room from past years.

    A tax-free savings account (TFSA) is another option. Like an RRSP, a TFSA can hold any combination of eligible investment vehicles, including stocks, bonds, cash and more, and the growth will be tax-sheltered. “In general, for someone at a lower income level, they might be better off maxing out their TFSA first, and then looking at their RRSP as a source of retirement income,” says Gormely.

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    Karen Robock

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  • OAS payment dates in 2024, and more to know about Old Age Security – MoneySense

    OAS payment dates in 2024, and more to know about Old Age Security – MoneySense

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    For example, for income year 2023, the threshold amount is $86,912. If your income in 2023 was $120,000, then your repayment would be 15% of $33,088 (the difference between $120,000 and $86,912). That comes out to $4,963.20.

    OAS clawbacks are paid off in 12 monthly payments, starting in July of the following tax year (in this case, 2024) and ending the next June (2025, in this example). This July-through-June period is called the “recovery tax period.” Continuing our example: $4,963.20 divided by 12 is $413.60. That’s how much you would repay each month from July 2024 to June 2025. (See the OAS recovery tax thresholds for income years 2022 and 2024.)

    How can I avoid OAS clawbacks?

    With some planning, it may be possible to reduce or avoid OAS clawbacks. One strategy is splitting pension income with a spouse who has a lower marginal tax rate. Another strategy is to base withdrawals from your registered retirement income fund (RRIF) on the younger spouse’s age—your minimum withdrawals may be lower. Keep in mind that different kinds of investment income are taxed differently, too. (Learn more about how passive income is taxed.) Consider speaking to a financial advisor or tax planner about these and other strategies. 

    What is the Guaranteed Income Supplement (GIS)?

    The Guaranteed Income Supplement (GIS) is a part of the OAS program that provides an additional, non-taxable monthly payment to Canadian residents who receive the OAS and whose previous-year income is below a certain threshold. Like OAS, the GIS is indexed to inflation.

    The income threshold changes annually. For example, from July to September in 2024, the threshold is $21,768 for a single person. If your 2023 income was less than that, you may qualify for the GIS. 

    For couples, the maximum income thresholds for combined annual income in 2023 are:

    • $28,752 if your spouse/common-law partner receives the full OAS pension
    • $52,176 if your spouse/common-law partner does not receive OAS
    • $40,272 if your spouse/common-law partner receives the Allowance benefit (a non-taxable payment for Canadians aged 60 to 64 whose partner is eligible for the GIS and your combined income is below the threshold for the Allowance)

    If you don’t receive a letter from the government about the GIS, you can submit an application through a My Service Canada Account or by filling out a paper form and submitting it to Service Canada. You can apply for OAS and the GIS at the same time. Learn more about applying for the GIS.

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    Keph Senett

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  • Which types of pension income can be split with your spouse in retirement? – MoneySense

    Which types of pension income can be split with your spouse in retirement? – MoneySense

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    Here, we’re focusing on splitting pension income, which can include income sources that are not from traditional pensions.

    Can you split your income?

    Here’s a quick table for when you can and when you can’t split your income. Tap the pension income type to keep reading for the why and how.

    Income splitting for DB pensions

    When people think of pensions, they typically think of defined benefit (DB) pension income. DB pensions are calculated based on a formula that generally considers annual income and the number of years as an employee with the employer offering the pension, along with other factors, too. Most DB pensions will not make payments until age 55, but it may be possible to collect a pension earlier.

    DB pension income qualifies to split with your spouse or common-law partner. You can move up to 50% of the income to your spouse on your tax returns. You claim a deduction and they claim an income inclusion. You would only split pension income if it resulted in a net advantage, whether a reduction in combined tax payable or an increase in government benefits.

    Can you split income for SERPs?

    Supplemental executive retirement plans (SERPs) are non-registered plans for executives or other employees. And it bears mentioning that a supplemental DB pension, or top-hat executive pension, with payments that exceed the registered pension plan (RPP) maximums will not qualify for splitting.

    These pensions include a registered portion and an unregistered portion. The registered portion can be split, but the unregistered portion can only be reported on the recipient spouse’s tax return. The split between registered and unregistered will be reported on the pensioner’s government-issued tax slip so should be clear.

    What about RRSPs?

    Most people’s retirement savings are in their registered retirement savings plan (RRSP) account, including defined contribution (DC) pensions. RRSP withdrawals do not qualify for pension income splitting. However, if you convert your RRSP to a registered retirement income fund (RRIF), subsequent withdrawals will qualify starting when the account holder reaches age 65.

    You do not have to convert your RRSP to a RRIF until December 31 of the year you turn 71, with withdrawals beginning at age 72. But the ability to split RRIF withdrawals at 65 may cause someone to consider converting their account by age 64.

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    Jason Heath, CFP

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  • CPP payment dates this year, and more to know about the Canada Pension Plan – MoneySense

    CPP payment dates this year, and more to know about the Canada Pension Plan – MoneySense

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    About the Canada Pension Plan (CPP)

    The Canada Pension Plan is a retirement pension that offers replacement income once a person retires from working life. The CPP is a social insurance plan, and it’s one “pillar” of the retirement income system for Canadians—the other three are Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and personal savings. The CPP is funded by contributions from workers, employers and self-employed individuals. It’s not paid for by the government, despite what many Canadians may think.

    A federally administered program, the CPP is mandatory, meaning that all Canadian workers and employers must contribute. The plan covers all of Canada except for Quebec, which has the Quebec Pension Plan (QPP) for residents of that province. Below are the remaining 2024 CPP payment dates.

    CPP payment dates for 2024

    • January 29, 2024
    • February 27, 2024
    • March 26, 2024
    • April 26, 2024
    • May 29, 2024
    • June 26, 2024
    • July 29, 2024
    • August 28, 2024
    • September 25, 2024
    • October 29, 2024
    • November 27, 2024
    • December 20, 2024

    Where does the CPP money come from?

    Unlike OAS and the GIS, the CPP is funded by employers and employees, and by self-employed people. These contributions, which show up as deductions on a paycheque, are aggregated and invested. For self-employed people, the CPP owed on your net business income is added to your tax bill. The principal plus any revenue earned goes back into the program.

    In January 2024, CPP contributions were raised as part of a seven-year government initiative, started in 2019, to increase retirement income. Read more about the CPP enhancement to see how much more you will pay as an employee or a freelancer.

    Who manages the CPP’s investment portfolio?

    The pension plan’s investments are managed by CPP Investments, a Crown corporation operating at arm’s length from the government. Every three years, the Office of the Chief Actuary of Canada evaluates the sustainability of the plan; the next review will be in 2025. “The CPP is projected to be financially sustainable for at least the next 75 years,” CPP Investments states on its website.

    Am I eligible for CPP?

    If you’re at least 60 years old and have made at least one contribution to the CPP, you are eligible to receive CPP payments. You may also be eligible if you’ve received CPP credits from a former partner or spouse who paid into the plan. CPP benefits are available to Canadian citizens, permanent residents, legal residents or landed immigrants.

    Should I apply for CPP or QPP?

    If you contributed to both the CPP and/or the QPP in Quebec during your working years, your residency at the time of your application determines which plan you’re eligible for—if you’re a Quebec resident, you apply for your pension from the QPP. Otherwise, you apply to the CPP.

    When you can start receiving your CPP

    You’re eligible to start receiving your pension anytime between the ages of 60 and 70 years old, but the younger you are when you begin receiving CPP, the smaller your monthly payouts will be. Many Canadians choose to begin receiving payouts at age 65.

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  • “Should I delay my CPP if I’m not contributing to it?” – MoneySense

    “Should I delay my CPP if I’m not contributing to it?” – MoneySense

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    Ask MoneySense

    Do all the advice articles about waiting to take CPP at age 70 take into account the calculation of your eligible amount if you stop working and contributing at, say 60 years old, and therefore have 10 years of no contributions?

    –Gary

    An applicant can begin their Canada Pension Plan (CPP) retirement pension as early as age 60 or as late as age 70. The earlier you start your pension, the lower your payments. Deferring CPP will result in higher monthly pension payments, albeit for a shorter period of time—fewer total months of payments—over the rest of your life. 

    Retiring at 60 or earlier

    If someone retires at age 60, Gary, their CPP contributory period that began when they turned 18 could be as much as 42 years. I say “as much as” because periods of disability or when your income was low because you were the primary caregiver for your children may be eligible to drop out from the CPP calculation. 

    This contributory period is important because if you do not make the maximum contributions during this period, you will generally not receive the maximum CPP retirement pension.

    What do most people receive from CPP?

    Most people do not receive the maximum. In fact, the average monthly CPP retirement pension payment at age 65 as of January 2024 was only $831.92, well below the maximum of $1,364.60. That means the average applicant is receiving less than 61% of the maximum. 


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    General dropout and zero-income years after 60

    There is a general dropout period from the CPP calculation of 17% of the years in your contributory period, which would be about seven years at age 60 for someone with no periods of disability or child-rearing eligibility. Let us build on this example, Gary. 

    If you are 60 and defer CPP to age 61 while not working, this may result in one more year of zero contributions and a contributory period (after the general dropout) that increases to 36 years. One divided by 36 equals about 2.78%. That could be the reduction in your CPP for deferring while having no income. 

    However, deferring CPP results in a 0.6% monthly increase in your pension, or 7.2% per year. This is regardless of your contributory period. 

    So, in our example, a year of deferring results in a 7.2% deferral increase but a 2.78% zero-income decrease. The net benefit is still a 4.42% increase in your pension plus the annual inflation adjustment. 

    A year of no income for someone with less than the maximum required contributions between 60 and 65 does have a small negative impact on the benefit of deferring, Gary. But deferring still results in a higher pension in this example. 

    Deferring CPP after 65

    If you defer CPP past age 65, you can drop up to five additional years from your contributory period for the years between 65 and 70. That means years with no earnings after age 65 will not impact your retirement pension when you defer after age 65. 

    CPP deferral after age 65 will boost your pension by 0.7% per month or 8.4% per year plus an annual inflation adjustment. Statistics show few people defer CPP after age 65. Generally, in recent years, less than 5% have waited until age 70.

    Ultimately, CPP timing should be a somewhat personal decision based on contributory history, life expectancy, investment risk tolerance and, of course, income needs. Healthy seniors, especially women (who tend to live longer than men) and those with a lower investment risk tolerance, may benefit from deferring CPP.


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    More from Jason Heath:

    The post “Should I delay my CPP if I’m not contributing to it?” appeared first on MoneySense.

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    Jason Heath, CFP

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  • Don’t get stuck on financial advice that doesn’t ring true – MoneySense

    Don’t get stuck on financial advice that doesn’t ring true – MoneySense

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    Dividends are after-tax profits a company distributes among its shareholders, typically every quarter, and can be paid in cash or a form of reinvestment.

    Heath said a company that pays a high dividend reinvests less of its profit into growth, potentially losing out on opportunities to up its market value. In Canada, stocks with high dividends come from a narrow slice of the stock market—banks, telecoms and utilities. 

    “Ideally, an investor should consider a combination of stocks with high and low dividends to have a well-diversified portfolio,” he said.

    Contribute to RRSP, save on taxes

    “There’s a lot of taxpayers, investment advisers and accountants who really promote the concept of putting as much into your (registered retirement savings plan) as you absolutely can,” said Heath.

    As a financial planner, he thinks the contrary. Heath says using RRSP contributions to get the biggest tax refund possible is not necessarily the best approach for people in low tax brackets and can hurt them in the long run when they withdraw those savings at a higher tax bracket in retirement.

    “Sometimes, it’s OK to pay a little bit of tax, as long as you’re paying at a low tax rate,” he said.

    Instead, tax-free savings account (TFSA) contributions could be better for someone with a low income. 

    It can be wise to use the low tax bracket by taking RRSP withdrawals early in retirement, even though it might feel good to withdraw only from your TFSA or non-registered savings and keep your taxable income low. 

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  • Planning for retirement with little or no savings to draw on – MoneySense

    Planning for retirement with little or no savings to draw on – MoneySense

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    Retiring with little to no savings can be challenging, but it is not impossible.

    Canada Pension Plan (CPP)

    For a retiree who has worked most of their life, the Canada Pension Plan (CPP) will provide a modest retire income. The CPP retirement pension is meant to replace 25% of your historical career earnings, up to a certain limit. The CPP enhancement that started in 2019 will gradually increase that replacement rate to 33% over time.

    In 2024, the maximum CPP retirement pension payment at age 65 is $1,365 per month—that is up to $16,375 per year. However, most retirees do not make enough CPP contributions during their careers to receive the maximum. In fact, the average CPP pensioner was receiving only $758 per month in October 2023—about 58% of the maximum. A CPP Statement of Contributions can be obtained from Service Canada to help estimate your future CPP pension.

    CPP retirement pension payments can start as early as age 60 or as late as age 70, and the later you start your pension, the higher the benefit you will receive. There can be a lot of factors to consider related to timing your CPP pension, and payments are adjusted annually to account for increases in inflation and the cost of living.  

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    Old Age Security (OAS) and the Guaranteed Income Supplement (GIS)

    Beyond CPP, retirees can also expect to receive an Old Age Security (OAS) pension. OAS is not based on work or contribution history, as it is a non-contributory pension. It is instead based on residency. A lifetime or long-time Canadian resident may receive up to $713 per month at age 65 as of the first quarter of 2024, which is $8,565 annualized. A 2022 change to OAS now means that pensioners aged 75 and over receive a 10% increase in their OAS pension. The maximum for a 75-year-old in the first quarter of 2024 is $785 per month, or up to $9,416 per year. This assumes they started their pension at age 65. OAS is adjusted quarterly based on inflation.

    OAS can begin as early as age 65 or as late as age 70. Delaying OAS can boost payments by 0.6% per month or 7.2% per year, so that you get more monthly, but for fewer years. 

    A low-income retiree with little to no retirement savings should consider starting OAS at 65, especially if they are no longer working. The ideal timing of a CPP retirement pension is a little more variable, but the main reason to consider applying for OAS at 65 is a related benefit called the Guaranteed Income Supplement (GIS). 

    GIS is a tax-free monthly benefit paid to OAS pensioners with low incomes. Single retirees whose incomes are below $21,624 excluding OAS may receive up to $1,065 per month, or $12,786 per year, as of the first quarter of 2024. The maximum income and benefit for couples varies depending upon whether both are receiving OAS. If both spouses are receiving the full OAS pension, their maximum combined income to qualify for GIS is $28,560 excluding OAS, and the maximum monthly benefit is $641 each ($7,696 annually). If your spouse is not receiving an OAS pension, the income limit rises to $51,840 excluding OAS, and a $1,065 monthly ($12,786 annual) maximum benefit applies.

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    Jason Heath, CFP

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  • How much should I charge for freelance services? – MoneySense

    How much should I charge for freelance services? – MoneySense

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    Pricing your services can be tricky, even for experienced freelancers. Let’s go over the factors to consider when deciding your rates. There are three parts to this: understanding the market you’re in, determining your income needs and your business’s break-even point and, lastly, setting your price using cost-based or value-based pricing.

    1. Understanding the market

    The first step in finding out how much you should charge for freelance services is to do market research. You’ll want to determine the following: 

    • Competitors: Who are the other players (businesses or freelancers) that offer the same or similar services in your industry or region? 
    • Customers: Who are your competitors targeting? Who are their customers, where are they, and what specific products or services are they buying?
    • Pricing: How are your competitors pricing their services? Check their websites to see whether they use hourly or project-based pricing. What factors might play a role in their pricing—for example, do they provide unique value or services, do they have lots of experience, or do they charge below-market prices to attract customers? 

    Then, map out where you fall into this mix, and use your research as a benchmark when making your own decisions. When doing this analysis, you can figure out your place in the market using the popular S.W.O.T. method: find out the strengths, weaknesses, opportunities and threats in your business environment (your geographical region or your competition online, for example). This will also help you compare your offerings to those of other vendors. 

    If you’re a freelance event photographer, for example, and you offer photos but not videos, your service packages should be priced lower than those of freelancers who offer both. This could help you attract customers who are looking for more affordable rates. And, you could also expand your services to include video in the future.

    By the end of your research, you should be able to answer some questions about how much you will invoice as a freelancer, such as: 

    • What are the going rates for services in your industry?
    • Will you charge hourly for your services, or will your pricing be project-based, or both?
    • If you are charging for projects and/or packages, what services will they include?
    • Will you have different bundles or packages at different price points, based on your costs and the value you provide to the customer? 

    How much to invoice as a freelancer 

    Now, you need to determine the dollar amount you should charge for your freelance services. There are two parts to this: a personal needs assessment and calculating your business expenses.

    1. Personal needs assessment

    How much will you need to pay yourself? Understanding your personal needs (rent payments, utilities and other necessities) versus wants (discretionary spending on food, entertainment or hobbies) will help you determine what you are able to pay yourself and what you are willing to sacrifice until your business grows. 

    Let’s say your needs require that you earn at least $1,000 a month from freelancing in addition to your other sources of income. When determining your personal payout, you need to consider your income tax bracket as well—new freelancers often forget about this. If your needs cost you $1,000 per month, and you’re roughly in a 30% tax bracket, you’ll need to pay yourself at least $1,300 from the business. (Read more about tax brackets, how they work in Canada and find out how much taxes you may have to pay.)

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    Shalini Dharna Kibsey, CPA

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  • How to qualify for EI benefits in retirement – MoneySense

    How to qualify for EI benefits in retirement – MoneySense

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    What are EI benefits? What are special benefits?

    Regular benefits are paid to eligible employees who lose their job through no fault of their own, JM. Typically, this would include those who are terminated because of a restructuring or those who work in seasonal industries.

    Special benefits include parental benefits (maternity and parental leave), sickness benefits (for those who cannot work due to injury or illness), compassionate care benefits (for those caring for a seriously ill family member needing end-of-life care) or parents of critically ill children benefits (regardless of their age).

    An optional retirement is not a qualifying reason for EI benefits, JM, because it does not fall into the special benefits categories and regular benefits are not meant to pay out to people who choose to stop working.

    Can you get EI if you quit your job in Canada?

    If your retirement, JM, is not your choice, you may qualify for regular benefits. Of note is that there are several reasons when quitting a job is considered “just cause,” but you must be able to substantiate to Service Canada that quitting was the only reasonable option.

    These reasons may include:

    • sexual or other harassment
    • needing to move with a spouse or dependent child to another place of residence
    • discrimination
    • working conditions that endanger your health or safety
    • having to provide care for a child or another member of your immediate family
    • reasonable assurance of another job in the immediate future
    • major changes in the terms and conditions of your job affecting wages or salary
    • excessive overtime or an employer’s refusal to pay for overtime work
    • major changes in work duties
    • difficult relations with a supervisor, for which you are not primarily responsible
    • your employer is doing things which break the law
    • discrimination because of membership in an association, organization or union of workers
    • pressure from your employer or fellow workers to quit your job

    Can you receive EI and OAS and CPP?

    If you do qualify for EI benefits, JM, your Old Age Security (OAS) pension won’t impact your eligibility for EI benefits, since it is an age-based pension that does not have to do with work or earnings. However, Canada Pension Plan (CPP) or Québec Pension Plan (QPP) benefits will, as they are pensions that are related to work and earnings. Likewise, with employer pension plans and even foreign pensions that arose from employment in another country.

    CPP, QPP and employer pensions generally constitute “earnings” that reduce your entitlement to EI benefits and must be reported to Service Canada. These types of earnings are deducted from your EI benefits.

    There is an impact on your EI if you have earnings while receiving it, whether from employment, self-employment, or CPP/OAS/workplace pension income. You lose $0.50 of your EI for every $1 you earn up to 90% of your previous weekly earnings. For earnings in excess, EI benefits get reduced dollar-for-dollar.

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    Jason Heath, CFP

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  • What is the CPP enhancement? – MoneySense

    What is the CPP enhancement? – MoneySense

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    The second phase of the Canadian Pension Plan (CPP) enhancement program has come into effect as of January 2024, and with it, the final CPP contribution rate increase for most Canadians. In an effort to ensure adequate retirement pensions, this seven-year government initiative involving incremental raises to the contribution rate came into effect in 2019, and it involved incremental raises to the contribution rate.

    Now, the second CPP enhancement is introducing an additional “earnings ceiling,” which will affect some middle- and high-income earners. Does that include you? Learn everything you need to know about the CPP enhancement and the 2024 changes in this explainer.

    Why are CPP contributions increasing?

    The CPP is one of three primary government programs, along with Old Age Security (OAS) and the Guaranteed Income Supplement (GIS), designed to provide Canadians with income to last them throughout retirement. For some workers, this amount is supplemented by an employer-provided defined benefit (DB) plan, which guarantees a certain amount of income for life, while others save for retirement using vehicles like registered retirement savings plans (RRSPs).

    According to Evan Parubets, head of the advisory services team at Steadyhand Investment Funds Inc., this approach worked for many decades. “We used to have average savings rates of over 20% in Canada, back in the early ’80s,” he says, “but saving rates have basically been falling for decades.”

    Declining personal savings isn’t the only issue. “Over the last several decades, companies have let go of defined benefit plans and replaced them with defined contribution plans,” Parubets says. These packages have employers matching employee contributions for investment. “This brought in more unpredictability towards retirement.”

    By 2019, it became clear that many Canadians were not going to have sufficient savings or assets for their retirement, says Parubets. “The government made a decision to essentially enhance the government benefits to make up for the lack of private benefits.” 

    The CPP enhancement

    Introduced in 2016 and begun in 2019, the CPP enhancement is a seven-year program designed to boost retirement pensions by increasing the amount of CPP contributions.

    How CPP contributions are calculated

    Since the CPP was introduced in 1965, Canadian workers have contributed by way of payroll deductions or, in the case of self-employed people, at tax time.

    Each Canadian worker can earn up to $3,500 (the “basic exemption amount”) without paying into CPP. Think of this as your personal base rate when you file your taxes. Any money you earn after that is subject to CPP deductions—up to the year’s maximum pensionable earnings (YMPE). The YMPE is also called an “earnings ceiling”—that is, anything earned above this amount will not be subject to additional CPP contributions.

    In 2018, prior to the first enhancement, the rate for Canadian employees was 4.95% (with employers matching this contribution). Self-employed Canadians paid double—or 9.9%—because for these purposes, they serve as both the employer and employee. So, with a YMPE of $55,900 in 2018, an employed person earning that much or more would pay 4.95% in CPP on $52,400 ($55,900 minus the basic exemption amount of $3,500), for a total of $2,593.80. A self-employed person making $55,900 or more would pay double, for a total of $5,187.60.

    The first enhancement (CPP1)

    The federal government introduced the CPP enhancements as a seven-year plan with two phases, each with escalating YMPEs and CPP contribution rates. This way, Canadians wouldn’t have to absorb the new costs all at once.

    The first enhancement, CPP1, went into effect in 2019 with a YMPE of $57,400 and a CPP contribution rate of 5.1% (10.2% for self-employed people). Over the next five years, both the YMPE and the contributions rates increased marginally. In 2023, the YMPE was $66,600 with a contribution rate of 5.95% (11.9% for self-employed people).

    The second enhancement (CPP2)

    The final phase of the CPP enhancement starts in January 2024. Instead of raising the rates further, this phase adds a year’s additional maximum pensionable earnings (YAMPE), or second earnings ceiling, with a contribution amount of 4% for employees and 8% for freelancers and other self-employed Canadians. In other words, the second earnings ceiling is meant to capture a portion of the income of higher-earning Canadians.

    To understand how the CPP enhancements work, let’s use an example of someone with an annual salary of $100,000, to make the math clear. 

    Jameela from Edmonton earns $100,000 annually as an employee. Under CPP1, with the 2023 rates of 5.95% and a YMPE of $66,600, she would owe $3,754.45, based on the following formula: ($66,600 minus the basic exemption amount of $3,500) x 5.95%. Jameela would pay nothing on any amount she makes over $66,600.

    In 2024, with a YMPE of $68,500 and a YAMPE of $73,200, Jameela’s CPP contributions are a bit different. She will pay 5.95% on the first $68,500 (minus $3,500), for a total of $3,867.50. In addition, she owes 4% on the money she earns between the first and second earnings ceilings (or between the YMPE and YAMPE), which is: $73,200 – $68,500 = $4,700. Multiplied by 4%, that comes out to $188. Her contributions will total $4,055.50.

    How much are CPP contributions going up in 2024?

    As of 2024, the CPP contribution rates for employees and the self-employed are the same as in 2023: 5.95% and 11.9%, respectively, unless they make more than the YMPE, which is $68,500 in 2024 and an estimated $69,700 in 2025.

    Workers who make more than the YMPE will contribute more—at a rate of 4% for employees and 8% for freelancers. This rate will only apply to the earnings between the first and second earnings ceilings.

    How does the CPP enhancement affect freelancers?

    Self-employed Canadians have always had to pay both the employer and employee portions of their CPP contributions, and it’s no different with these enhancements.

    “Compared to employed individuals, they are certainly at a disadvantage in the sense they have to pay double,” Parubets says. “Nevertheless, it is a form of savings. You’re getting that money back.” Plus, everyone can claim a federal tax credit of 15% of their CPP contributions. Self-employed contributors can also deduct the employer portion of their CPP contributions yielding tax savings at their marginal tax rate.

    As with Canadian employed workers, just how much a Canadian freelancer will pay depends on their income. For example:

    James is a freelancer in Quebec City who makes $55,000 per year, so his earnings fall under the first earnings ceiling. He will pay 11.9% on his eligible income. However, in 2025 he takes on a new client and his earnings jump to $80,000. Therefore, he will pay 11.9% up to the YMPE and 8% on the money between the YMPE and the YAMPE.

    It bears mentioning that in the example of James, living in Quebec, he will be contributing to the Quebec Pension Plan (QPP). The QPP mirrors the CPP in terms of contributions and earnings thresholds, as well as pension payments.

    What about low-income Canadians?

    Most Canadians, no matter their incomes, will benefit from the raised CPP rates when they retire due to a higher pension, with one notable exception—retired workers who qualify for the GIS.

    “Say you’ve been working low-income jobs all your life and contributing to CPP. Eventually you’ll get your money back,” says Parubets. “But if you’re still low-income and on GIS, they’ll claw back the GIS pension money that you would have otherwise been entitled to.” (A clawback is a means-tested reduction in government benefits.) The clawback rate hovers somewhere between 50% and 75%. “A person who’s never worked and never contributed to CPP will likely get most if not all their GIS benefits.”


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    Read more about CPP:

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  • Where should working retirees put extra income: A TFSA or an RRSP? – MoneySense

    Where should working retirees put extra income: A TFSA or an RRSP? – MoneySense

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    RRSP vs. TFSA for retirees

    Now to your question: Should you contribute to your RRSP or TFSA? I don’t know your circumstances, but I can show you the math. In the table below, you are going to see that there is no real difference if your marginal tax rate is the same at time of contribution and time of withdrawal.

    RRSP vs. TFSA comparison on a $10,000 contribution over one year

    RRSP TFSA
    Gross contribution $10,000 $10,000
    Income tax (30% tax rate) $0 $3,000
    Net contribution $10,000 $7,000
    5% investment growth $500 $350
    Value of account $10,500 $7,350
    Tax owing $3,150 $0.00
    After tax value $7,350 $7,350

    The math for retires investing in an RRSP and TFSA

    The above table shows that all things being equal a dollar invested into a RRSP or TFSA yields the same results. This is why it’s argued that an RRSP provides tax-free growth after all if, dollar for dollar, it gives the same after-tax value as a TFSA.

    How could it not?

    You may have questions about the table. For example, if you invest $10,000 and end up with $7,350 after one year, how is that a good investment? The $10,000 number is a before-tax figure. Remember, if you’re given $10,000 at the beginning of the year, and have a marginal tax rate of 30%, then you would be left with $7,000. Investing in a RRSP or TFSA leaves you with $7,350 after tax, so you have a gain.

    The other thing to remember is that RRSP contributions are made with pre-taxed money and TFSA contributions are made with after-tax money. This is why you see the $3,000 income tax entry under the TFSA column, to make it a fair comparison. 

    Where should Canadian retirees put their money

    Now to your question Gary, should you contribute to your RRSP or TFSA? You see there’s no difference between investing inside an RRSP or a TFSA if your marginal tax rate is the same at time of contribution and withdrawal. If your marginal tax rate is higher at time of withdrawal, then the TFSA has the advantage. Conversely, if your tax rate is lower at time of withdrawal the advantage goes to the RRSP.

    Also, consider that RRSPs and TFSAs are both available tax shelters to maximize when sensible and if possible. Canadians are to only contribute to their RRSPs until they turn 71, whereas TFSA contributions can be made right up until death. If there’s a chance you receive a lump sum of money from an inheritance, home sale, and so on, you may want to save your TFSA contribution room and use your RRSP now, while you can. 

    There are some other finer details to think about. Does the RRSP tax deduction help with your age credit? Will future RRSP withdrawals result in OAS or Guaranteed Income Supplement clawback?

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    Allan Norman, MSc, CFP, CIM

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