2019 Financial Planning Strategies for Seniors

Welcome to the Alzheimer Society of Montreal Blog!

Edition #5

August 2019

Author :

Gabriel Flores

Investment Advisor

Preserving and growing your wealth may involve implementing tax, investment and estate planning strategies that suit your circumstances and goals. While some strategies are available throughout your lifetime, others are only available in the year you turn age 65 and beyond. This article discusses financial planning considerations for seniors and offers an overview of commonly used strategies.

Income splitting

• Pension income splitting: If your spouse has a lower marginal tax rate, consider splitting eligible pension income with them to reduce your family’s overall tax bill. Eligible pension income includes, but is not limited to, life annuity payments from a pension plan and, when you’re 65 years or older, it also includes withdrawals from your RRIF, LIF, RLIF, LRIF and Prescribed RRIF accounts. Withdrawals from your RRSP are not considered eligible pension income. Generally, you can allocate up to 50% of your eligible pension income to your spouse. Please note that you must be age 65 or older in order to split eligible pension income for Quebec tax purposes.
• Spousal RRSP contribution: If you expect your retirement income to be higher than that of your spouse, consider making contributions to a spousal RRSP. If you have unused RRSP contribution room and your spouse is not yet age 71, you can continue to make spousal RRSP contributions even if youare over age 71. Making a spousal contribution will provide you with a deduction on your tax return and may help you equalize your family’s future retirement income.
• Pension sharing: If you and your spouse are both 60 years of age or over and are receiving or are eligible to receive the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP) benefits, consider sharing your pension with your spouse. Service Canada or Retraite Quebec will recalculate the pensions that are paid to you and your spouse if you apply for pension sharing. Pension sharing would be beneficial where you can have some of the higher income spouse’s CPP or QPP be paid to the lower income spouse so it is taxed in their hands.

Tax minimization strategies

• Forgotten RRSP contribution: If you’re turning age 71 this year and are still earning RRSP contribution room or have unused room carried forward, consider making a final RRSP contribution (based on your earned income for 2019) by December 31, 2019, before converting to a RRIF or other RRSPmaturity option. Although you’ll besubject to a 1% over-contribution penalty for the month of December, the benefit of the tax-deferral and compounding growth in the RRIF may outweigh the penalty.
• Tax-Free Savings Account (TFSA) contribution: Consider contributing to your TFSA. The annual TFSA contribution limit for 2019 is $6,000. If you’ve been eligible to open a TFSA since 2009 and have not yet contributed to one, your contribution limit would be $63,500 as of January 1, 2019. Any income earned (including capital gains) in the TFSA and any withdrawals you make from the account are generally tax-free and do not affect your federal government income-tested benefits such as Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). The income you earn or the withdrawals you make will also not impact your entitlement to federal tax credits such as the age amount. The TFSA can also be used to shelter money that you may not currently need. For example, if you don’t require your entire mandatory minimum RRIF payment to fund your expenses, consider contributing any excess after-tax amount to your TFSA.
• Use your spouse’s age for RRIF minimum payments: By the end of the calendar year in which you turn age 71, you are required to convert your RRSP into a RRIF, purchase an annuity with the RRSP assets or take the value of the RRSP as a taxable lump-sum payment. You can use any of these options or you may choose to combine some of these options. If you choose to convert to a RRIF, have a younger spouse and do not need themandatory annual minimum RRIF payments, consider using your younger spouse’s age when setting up the RRIF to minimize your taxable RRIF withdrawals.

Government benefits

• Old Age Security: OAS benefits are available to anyone 65 years of age or over who meets the eligibility requirements. The amount of your OAS pension will be determined by how long you’ve lived in Canada after age 18. You can postpone receiving your OAS payments for up to five years and in turn receive a higher OAS monthly payment. The maximum benefit for January to March 2019 is $601.45 per month assuming you did not previously defer your OAS payment. This income-tested benefit is clawed back at a rate of $0.15 for every $1 of net income over $77,580 and is fully clawed back once your net income reaches approximately $126,000 if you’re entitled to the maximum OAS benefit and have not chosen to defer your OAS benefit. If your income in the previous year was uncharacteristically high due to a unique one-time taxable transaction (for example, a large severance payment or a large capital gain from selling your business or real estate property), your OAS payments may be clawed back. If you expect the your income for this year will be substantially lower than your income for lastyear, you can submit a request to reduce the amount withheld on your future OAS pension payments. You can submit the request by completing CRA Form T1213 (OAS), Request to Reduce Old Age Security Recovery Tax at Source.
• Canada Pension Plan and Quebec Pension Plan: If you’ve ever worked in Canada, you may be eligible to receive CPP or QPP payments. The CPP and QPP payments are based on your past contributions to these programs and are not incometested. You can start receiving CPP and QPP as early as age 60, but you’ll receive a reduced pension in this case. The monthly amount you receive will be reduced by a certain percentage for each month you receive your pension before age 65. You are also able to delay receiving your CPP or QPP pension in order to receive an increased monthly amount. Your pension will be increased by a certain percentage for each month you delay receiving it, up to age 70. For additional information on increases or decreases to your pension, please ask an RBC advisor for an article on CPP/QPP.

Tax credits

• Age amount: If you’re 65 years of age or over, you may be able to claim the age amount on your tax return. The age amount is a federal non-refundable tax credit of $1,124 (15% of $7,494 for 2019). The credit is reduced by $0.15 for every $1 of net income above $37,790, and is completely eliminated when your net income is $87,750 or higher. Keep in mind that you may also be eligible to claim a corresponding provincial or territorial credit. If you do not need to claim all of the credit to reduce your federal taxes to zero, you may transfer any unused amount to your spouse. If you and your spouse can’t use the amount, the amount can’t be carried forward or back to other tax years and will be lost.
• Pension income: You may be entitled to receive a federal nonrefundable pension income tax credit on the first $2,000 of eligible pension income you receive in the year. Eligible pension income includes, but is not limited to, life annuity payments from a pension plan and, when you’re age 65 or over, it also includes withdrawals from your RRIF, LIF, RLIF, LRIF and Prescribed RRIF accounts. OAS payments and CPP and QPP payments do not qualify as eligible pension income. Again here, you may also be eligible to claim a corresponding provincial or territorial credit. If you don’t need to claim all of the credit to reduce your federal taxes to zero, you may transfer any unused amount to your spouse. Any unused amount can’t be carried forward or back to other tax years and will be lost.

Trust planning

• Inter-vivos trusts: Consider the benefits of setting up an inter-vivos trust, such as a family trust. An inter-vivos trust may be used to income split with your children or grandchildren or simply provide ongoing financial support for your children or other family members. An inter-vivos trust can also be used as a discrete means of transferring assets to your beneficiaries outside of your estate. Since assets in an inter-vivos trust do not pass through your estate, you may be able to avoid probate taxes in most provinces and territories. If you are age 65 or over, an alter ego trust or a joint partner trust (for you and your spouse) may provide you with additional tax and estate planning opportunities. Speak to a qualified tax advisor to determine if these types of trusts are right for you.
• Testamentary trusts: Consider creating a testamentary trust in your Will. A testamentary trust is an alternative to an outright distribution of your estate assets. It allows you to control the timing and distribution of assets to your beneficiaries. Testamentary trusts can be used to create solutions to complex family situations, for example a child with a disability, a spendthrift beneficiary, minor children or a second marriage. There was a time when testamentary trusts could be used for income splitting but this advantage has been eliminated. If you set up a testamentary trust to minimize taxation, you may want to review your estate plan. You should consult with a qualified legal advisor to discuss the merits of creating a testamentary trust in your Will.

Gifting

• Gift assets: Gifting assets to your children or grandchildren during your lifetime is a simple strategy that may help you reduce the size of your estate and thereforepossibly reduce probate and taxes on these assets during your lifetime and on death. For tax purposes, it’s important to recognize that you’re deemed to have disposed of the assets you gift at fair market value. Further, if you make gifts to minors, beware of the attribution rules, which could result in the dividend and interest income that is earned on the gifts to be attributed back to you and taxed in your hands.
• In-kind donation of publicly traded securities: If you have philanthropic intentions, you may want to consider gifting your publicly traded securities directly to a qualified donee. Qualified donees may be charitable organizations, public foundations or private foundations. Typically, a registered charity is a qualified donee. Any accrued capital gains on these securities should be exempt from tax. You will also receive a donation tax credit equivalent to the fair market value of the securities you donate, which may reduce your overall tax bill. If you’re interested in this option, remember to discuss your plans with the intended charity to ensure that they are willing and able to accept this type of gift.
• Charitable remainder trust: You may want to consider establishing a charitable remainder trust that generates an immediate donation receipt for you. Throughout your lifetime, you’ll receive income from the trust, and upon your death, the remainder will pass directly to the charity you name as the beneficiary. This approach may provide immediate tax relief to you, instead of your future estate. Consult with a qualified tax and legal advisor to determine whether a charitable remainder trust makes sense for you. It’s also important to discuss your plans with the charity to ensure that they are willing and able to accept this type of gift.

Estate planning

• U.S. estate tax: If you own any U.S. situs assets (which includes, but is not limited to, U.S. real estate and U.S. securities, both in your non-registered and registered accounts), it’s important to examine your potential U.S. estate tax exposure. You may be subject to U.S. estate tax even if you are not a U.S. person. Speak with a qualified tax advisor regarding strategies to minimize or eliminate your potential U.S. estate tax liability.
• Estate planning: Ensure that your Will, beneficiary designations, Power of Attorney documents (Mandate in Quebec) are valid, up-to-date and still reflect your wishes.

Conclusion

This article covers some common financial planning considerations for seniors. Depending on your particular situation and objectives, you may want to consider implementing some of the strategies discussed to help in organizing and securing your financial future. For more information on any of these topics, please speak with an RBC advisor and a qualified tax advisor.

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Gabriel Flores is an investment advisor at RBC.  The opinions of the author do not necessarily reflect those of RBC. This article is for informational purposes only.

This article may contain several strategies, not all of which will apply to your particular financial circumstances. The information in this article is not intended to provide legal, tax or insurance advice. To ensure that your own circumstances have been properly considered and that action is taken based on the latest information available, you should obtain professional advice from a qualified tax, legal and/or insurance advisor before acting on any of the information in this article.

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