Since the introduction of the TFSA, I have often heard that low-income Canadians cannot benefit from the RRSP and should be using the TFSA instead. The argument here generally hinges on qualifying for the Guaranteed Income Supplement (GIS).
For a quick review, the GIS is paid to those who have also qualified for OAS benefits, meaning they are at least age 65 and have at least 10 years of residency in Canada after the age of 18. The maximum GIS benefit as of June of 2019 is $898.32/mo for a single person. In order to receive that much benefit, this person would have to have employment income of less than $3500 and no other sources of taxable income, other than OAS. CPP benefits and RRIF or RRSP withdrawals will reduce the GIS. The rate of reduction for a single person is $.50 per $1 of income. A person who is collecting $5000/a of CPP and also withdraws $4000 from their RRSP in that year will lose $9000 x 50% = $4500 of GIS benefits, or $375 per month. If this single person earns more than $18,240 of taxable income, their GIS will be lost altogether.
For a couple, the GIS is payable to each of them, to a maximum of $540.77/mo. Here, the clawback is $.25 per $1 of household income. This couple can receive taxable income of up to $24,096/a before losing their entire GIS benefit.
Those who paid attention to the 2019 Federal Budget are likely aware that the exemption for GIS is increasing. Assuming nothing else changes, the exemption for employment income will increase to $5,000 in 2020, and will also include self-employment income. Employment or self-employment income between $5,000 and $15,000 will have a clawback rate ½ the normal rate, meaning 25% for a single person and 12.5% for a couple. For a couple, both can use the employment/self-employment income exemption.
This means, for most retirees, TFSA, OAS, and a small amount of employment/self-employment income can be received without reducing the GIS. I occasionally run into a financial planner who has a client with a very large amount of non-registered assets invested in a tax-efficient manner who delays CPP and RRIF payments as late as possible and starts OAS at 65 and is able to qualify for a small GIS benefit.
The conventional wisdom that I often hear is that low-income Canadians, if they are able to save at all, should be using the TFSA and forgoing the RRSP. I would like to challenge this belief, though I think it is correct in the majority of cases.
If you have a low-income earner who has a child, and is able to save at all for retirement, the benefit is that the low-income earner can not only obtain a tax deduction, but will also reduce their taxable income, which will have the benefit of increasing the Canada Child Benefit. This is only relevant where the following are true:
- Able to save for retirement
- Net income (which would be based on gross income less RRSP deductions and child care expenses) in excess of $30,450 (adjusted for inflation
- A child under the age of 18
By saving in the RRSP, rather than the TFSA, the client will receive a tax deduction and an increase in the CCB. For example, if this person has one child, earns $45,000/a, and contributes $1,000 to their RRSP, their CCB will be increased by $70/a, in addition to any other benefits.
The argument against saving this way is that, in retirement, there will now be RRSP/RRIF amounts. Those amounts will cause a reduction in the GIS income that would otherwise be received. My suggestion here is to deplete the RRSP/RRIF to create income in the first year or two of retirement, allowing the client to delay OAS at the same time. Delaying OAS will result in an increase of 7.2% per year of delay. This is likely to be very meaningful for our low-income earner. If, for example, the client is able to save just $1,000/a for 5 years, from age 30 to 35, and earns a 5% rate of return until age 65, there will be $23,881 available at age 65.
Many of you will be suggesting that low-income Canadians are not likely to receive financial planning to help with a scenario like this. I would challenge that, increasingly, there are opportunities for financial planners to work with lower-income earners. In fact, if you’re in the Edmonton area, I will be working with a couple of local charities to put on a training session in September of this year dealing with this very concept.
I would also like to take this opportunity to issue a correction concerning something in the prior newsletter. Our June edition dealt with RRSP and RRIF beneficiary designations. Right at the tail-end, I included a comment that the provisions in that newsletter article would generally apply to pensions as well. That is not necessarily true; there is a lot less flexibility with pensions than what I described for RRSPs and RRIFs in that article. This was pointed out to me by Dawn Hawley, CFP, TEP, CDFA. Dawn was a 2019 recipient of the Donald J. Johnston Lifetime Achievement Award in Financial Planning, owing to her wonderful work in advancing the profession of financial planning. BCC gives a scholarship to one financial planning student once per term in Dawn’s name.