Death and taxes. They’re the two things in life that are certain. We can’t get rid of them. But in the case of taxes, we can control them.
It is not simple, though. Let’s face it: even in Canada sovereign (government) debt is a pressing issue. Governments need to find ways of increasing tax revenues or cutting back on expenditures — whatever it takes to make ends meet.
In Canada (as in other countries) we have what is referred to as the baby boom phenomenon — something that has been impacting society for decades and will likely continue to do so for a while longer — at least until we’re all gone.
That won’t be for a while, but what will come sooner is our retirement — probably not as soon as most of us had hoped, but imminent nonetheless. And given our numbers as well as the amount of wealth as a generation we possess, it’s hard to believe that we won’t be part of the solution to our government’s debt woes.
In short what this will likely mean is that governments will need to shift focus from the taxation of employment income to either the taxation of investment income, or a reduction in retirement benefits paid. I would argue that this is already happening, with recent changes to the formula used to gross up dividend income being a prime example.
While the change went largely unnoticed (and was widely viewed as palatable), and did not have much of an impact on actual tax revenues, it did have an impact on the eligibility of many to receive the GIS or OAS.
It was very clever: cut back, but in a way that many of those affected don’t notice or even understand.
In fact I would hazard a guess that even the most financially savvy retired Canadians in many cases are unaware of the potential impact that dividend income can have.
At the same time, investing in dividend-paying stocks has historically been a great investment strategy. So what is a retiree to do? In my opinion, save money and increase your overall, after-tax retirement income by using the services of a financial advisor who can structure your retirement income as efficiently as possible — based on your personal circumstances.
As I have said, you cannot eliminate taxes — but you can control them. Personally my favoured approach is to begin by determining when and how taxes should be paid. And from there investors usually fall into one of three categories:
• Investors whose income can be kept low and therefore might qualify for the Guaranteed Income Supplement. For them it is advantageous to avoid dividend income to maintain GIS eligibility.
• Middle income earners who despite our best efforts will not qualify for the Guaranteed Income Supplement, but at the same time will not earn so much as to risk having Old Age Security clawed back. For them, dividends can be considered as a tax-efficient source of income.
• High income earners who might be affected by Old Age Security Claw-back, in which case dividend income should be avoided.
Keep in mind that dividend-paying investments can be purchased indirectly — meaning that investors can benefit from a proven investment strategy without the adverse tax consequences. For more information please feel free to call or email to schedule a consultation.
Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). The views of the author do not necessarily reflect those of RJL. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. This article is for information only. Securities are offered through Raymond James Ltd., member-Canadian Investor Protection Fund. For more information feel free to call Jim at 250-594-1100, or email at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.
