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Paul and Deirdre are well fixed financially but like most people, they don’t want to pay any more tax than they have to. They’d also like to keep as much of their Old Age Security benefits as they can.
Paul is 64, retired, with a defined benefit pension from his employer that is paying $118,000 a year, indexed to inflation. That includes a bridge benefit that will end in January when Paul turns 65, dropping his lifetime pension to $94,085 a year with a survivor benefit of $71,000 a year. Paul splits his income with Deirdre.
Deirdre, who is 58 and also retired, has no pension. They have two children, 21 and 24, both still living at their suburban Toronto home.
Paul is in the process of “retiring” from his three-year-old incorporated consulting business. The corporation has $280,000 available for paying out dividends that will be subject to personal income tax, he writes in an e-mail. The plan is to withdraw the funds “at the most tax-efficient rate possible,” he says.
The problem is how to achieve that. Can he split the income with Dierdre? “Does my incorporated one-man consulting business qualify for the Canada Revenue Agency’s tax on split income (TOSI) exemption for taxpayers over age 65?” Paul is the sole shareholder. They also ask when they should start taking government benefits.
“What we really need to find is that sweet spot that makes my money – Canada Pension Plan, Old Age Security and business dividends – go the furthest.”
In this Financial Facelift, Warren MacKenzie, an independent financial planner in Toronto, looks at Paul and Deirdre’s situation. Mr. MacKenzie holds the chartered professional accountant designation.
Government regulations are hurting DC pension plans
In this Charting Retirement, Frederick Vettese, former chief actuary of Morneau Shepell and author of the PERC retirement calculator, highlights how the seriously flawed regulations governing defined contribution (DC) pension plans can hamper one’s retirement planning.
Want to help your grandkids buy a house or go to school? Here’s how to pass along your wealth
As the cost of raising children, attending postsecondary education and buying a home steadily rises, a growing share of Canada’s silent generation and baby boomers are looking to gift part of their wealth to their grandchildren, writes Kelsey Rolfe, in this personal finance article.
Historically, financial advisers and estate planning experts say, most people would bequeath their wealth directly to their children, and leave it up to them to share a portion with their own kids if they chose. But some grandparents are setting aside money specifically for the second generation, and many are choosing to give while living.
“If I had to guess it would likely be in part because of how expensive it is to live in cities these days in Canada and raise kids,” says Jessica Feldman, a partner and wills and estate lawyer at Bales Beall LLP in Toronto, who adds that she’s seeing more and more grandparents give directly to their grandkids.
David Sweeney, senior wealth adviser at Sweeney Bride Strategic Wealth Advisory with Wellington-Altus Private Wealth in Squamish, B.C., noted that it isn’t uncommon for grandparents to feel that their adult children are doing well enough that their money would create more of a difference for their grandchildren.
“As a grandfather myself, … even though our grandkids are less than five years old, there’s a lot of time in front of them for us to really help make a big impact to the point when they are 25 or 30 and starting to make some financial decisions,” he says.
One in three Canadian grandparents are currently financially supporting their grandchildren or adult children, according to an October survey by Bloom Finance and Angus Reid. Of those respondents, 44 per cent said they felt obliged to help due to the rising cost of living. Half said the amount or frequency of financial support they’re providing has increased in the last two years, with 22 per cent of those supporting their grandchildren saying they were providing more than $5,000 a year.
Read the full article here.
In case you missed it
Want to retire abroad? Here’s how to make that dream happen
When you think of retirement, asks Jennifer Foden, do you picture yourself somewhere other than home? Whether you want to spend a few years travelling the world, ditch the Canadian winter for good or permanently move overseas – or on a cruise ship – it’s a dream for many, she notes, to retire abroad.
Take Debbie Beckford, originally from Toronto, who moved to Sarasota, Fla. over 15 years ago for work, and eventually decided to retire there six years ago.
“Housing was very reasonable in Florida so we were able to afford a beautiful home in a lovely area close to the Gulf of Mexico,” she says of the decision. Beckford adds that activities she and her husband like to do – concerts, hockey games, for example – are also less expensive than at home in Canada.
On the flip side, she says health care is a big challenge – “much like having a second mortgage” – and that the political climate has “become more troubling over the years.” In fact, Beckford is planning to move back to Canada in the next year or so to be closer to family.
Beckford’s story illustrates the number one lesson in retiring abroad: Try to figure out if the reality will match the dream.
“If you’re going to consider retiring abroad, number one, travel there and see if you like it, the place and the culture,” says Hannah McVean, a Squamish, B.C.-based certified financial planner with Objective Financial Partners. “But then, you’ll also want to do some research.”
McVean points to several factors to consider. “There could be a potential cost of living differential between our country and the other,” she says. “So that could accelerate financial independence or not.”
Read the full article here.
It’s time to reform Old Age Security – and a scathing auditor’s report confirms it
Bureaucrats have no idea whether Ottawa’s most expensive program – Old Age Security – is meeting its objectives, writes Paul Kershaw in this personal finance article. That is the scathing conclusion from Karen Horgan, Canada’s Auditor-General, this week.
Her office found that Employment and Social Development Canada (ESDC), which is responsible for the program, was not able to help government ensure OAS meets seniors’ needs because “the department collected information and data about seniors, but did not analyze it.”
This stunning finding leads to a number of critical questions that must be answered before the next budget. What are the objectives of the OAS program? By what metrics will Ottawa judge these objectives are being met? And how will we pay to achieve those objectives, given the cost of OAS, as currently designed, is increasing far more than any other federal program?
Answers can be found in the Auditor-General’s judgment that ESDC has not updated its thinking about what purpose OAS serves since it was created in 1952.
OAS delivered $40 a month back then, or $443 in today’s currency. Residents were eligible for this payment when they reached the age of 70, which was above the average life expectancy of 69 years at that time.
Today, Canadians are eligible for OAS at 65, when the average life expectancy is 83 years. Over the years, the monthly payment was increased faster than inflation, making it now $728 for seniors 65 to 74, and $800 for those 75 and older.
Read the full article here.
Dr. Paul Kershaw is a policy professor at the University of British Columbia and the founder of Generation Squeeze, Canada’s leading voice for generational fairness. He offers policy advice to governments of all party stripes, including the current federal cabinet.
Retirement Q & A
Q: I am a senior and owner of a small retail business in Southwestern Ontario. I am finding it difficult to determine how the government’s temporary “GST tax holiday” applies to the items I sell, and which are tax-exempt. I don’t want to overcharge my customers or be penalized for errors by the CRA at tax time. How can I make this as simple as possible?
We asked Simon Proulx, a partner with Indirect Tax at KPMG in Canada, to answer this one.
A: The proposed temporary GST/HST tax relief is good news for consumers, however implementation by Dec. 14 and the temporary nature of this measure represent a significant challenge for businesses.
The broad categories of items covered include children’s clothing, certain toys, alcoholic beverages, books, snacks, prepared foods and Christmas trees. There is still much uncertainty about specific items and the scope of the categories included. For example, it is not always easy to determine if an item such as a toy is marketed to children or adults. This information is usually not evident based solely on the product stock keeping unit.
As a business owner, you can choose to do a manual override or reconfigure your point-of-sale system to apply a temporary “zero rate” GST/HST and map items included in the government’s announcement to that category, so that the zero rate applies on a temporary basis. You will then need to reinstate the configuration back to the original setting after the Feb. 15, 2025 expiry date of the relief.
Businesses are also expected to cover the added costs involved in both reconfiguring and reinstating the tax. For some small businesses with razor thin margins, this may not be feasible.
You can decide not to collect the GST/HST on items you genuinely believe are covered in order to keep your customers satisfied. The risk is that if you are mistaken you may be reassessed by the CRA for failure to collect the tax, with interest applied.
Businesses can choose to collect the GST/HST out of an abundance of caution in situations where they are uncertain about whether an item is covered by the tax relief. There are no CRA penalties for collecting tax in error. In other words, collecting tax when in doubt is generally the prudent approach from a tax liability perspective.
If your business needs more time to verify the GST treatment of certain items, you will have two years to issue credit notes and refund GST/HST collected in error to your customers. Customers can also keep their receipts and seek a refund to the tax they believe was collected in error directly from the CRA.
Finally, it is important to educate staff and customers about how your business is taking into account this temporary measure to avoid misunderstandings.
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