Dividend income can be the least “income-friendly” to retirees because the grossed-up amount is reported on their tax returns. Although the dividend tax credit provides preferential tax treatment, the grossed-up amount exaggerates the total income on line 234.
Canadians age 65 and older may qualify for many valuable government benefits — Old Age Security and the Age Credit, are examples.
However, if the income reported on line 234 of the Federal Income Tax Form is too high, these benefits can be clawed back and, in some cases, forfeited altogether. This can result in the loss of thousands of dollars in benefits.
An in-depth look at the issue…
Avoiding clawbacks takes more than simply creating tax credits – which reduce the taxes owing. It is important to look at ways to actually reduce reported income. However, when retirement arrives, most of the familiar deductions (RRSP, pension, child care, union dues, etc.) are no longer available.
Here are two solutions for achieving this goal.
• Carefully structure your non-registered income — active management of income-generating investments can significantly affect the way income is taxed, and may help reduce clawbacks.
• Create dollar-for-dollar tax deductions — when retirement arrives, most of the familiar deductions (RRSP, pension, child care, union dues, etc.) are no longer available. However, there is another option.
RRSP top-up: Those with unused RRSP room should make a lump sum final contribution prior to converting to a RRIF. The resulting deductions can then be spread over several years.
To maximize benefits and retirement income:
• Identify investments that could be re-structured for more favourable tax treatment
• Explore the benefits of prescribed annuities
• Make withdrawals from a mutual or segregated fund where a large portion of the payment is considered a return of capital and the balance is capital gains
• Make a lump sum RRSP contribution prior to converting to a RRIF
Remember to always consult your advisor before taking any action.
Written by Stuart Kirk, CIM
Stuart Kirk is an Investment Funds Advisor with Manulife Securities Investment Services Inc and a Retirement Planning Specialist with Precision Wealth Management Ltd. The opinions expressed are those of the author and may not necessarily reflect those of Manulife Securities Investment Services Inc or Precision Wealth Management Ltd. For comments or questions Stuart can be reached at stuart@precisionwealth.ca or 250-954-0247.
