Fighting the clawbacks — reduce line 23400

Tax Managed Strategy 2

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 net income on line 23400 of the federal income tax return.

Canadians age 65 and older may qualify for many valuable government benefits, such as Old Age Security and the age amount credit. However, if the income reported on line 23400 is too high, these benefits can be clawed back and, in some cases, forfeited altogether. This can result in losing thousands of dollars in benefits.

An in-depth look at the issue ... and the opportunities

Avoiding clawbacks takes more than simply creating tax credits that reduce the taxes owing. When retirement arrives, most of the familiar deductions (RRSP, pension, childcare, union dues, etc.) are no longer available. It’s important to look at ways to reduce reported income. 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. The following example, based on $10,000 of non-registered investment income, shows the impact of different types of investment income.

Consider the amount reported on your tax return

Income of $10,000

This table shows how different types of non-registered investment income are reported on your tax return, including Eligible Dividends, GICs/Bonds, Capital Gains, Prescribed Life Annuities, Mutual/Segregated Fund Withdrawals, Series T Mutual Funds.

Create dollar-for-dollar tax deductions

As mentioned above, on retirement, most of the familiar deductions are no longer available. However, there are still some appealing options.

RRSP top-up 

Those with unused registered retirement savings plan (RRSP) room should make a lump-sum, final contribution prior to converting to a registered retirement income fund (RRIF). The resulting deductions can then be spread over several years. For more information, see “Final RRSP contributions at age 71.”

Borrow to invest

By using RRIF or other discretionary income to pay the interest on funds borrowed to invest, a tax deduction can be created. This strategy is for investors with discretionary income not needed for living expenses. For more information, see “Maximizing discretionary RRIF income by borrowing to invest.”

Ideal candidates

Investors who:

  • are retired or near retirement
  • want to maximize their government benefits

Take action

Take action

To maximize benefits and retirement income:

  • identify investments that could be re-structured for more favourable tax treatment
  • make withdrawals from a mutual fund or segregated fund contract, where a large portion of the payment is considered a return of capital and the balance is capital gains
  • consider the tax efficiencies of Series T mutual funds
  • make a lump-sum RRSP contribution before converting to a RRIF
  • consider a borrow-to-invest strategy
  • evaluate the tax savings of these strategies with our easy-to-use online calculator.

Investment options with Manulife Investment Management

Manulife Investment Management provides a range of investments and services.

Mutual funds from Manulife Investment Management can help meet your specific financial needs throughout your life. Whether you’re just starting out, accumulating wealth, or nearing/in retirement, mutual funds offered by Manulife Investment Management can provide you with solutions to help build a portfolio that meets your needs. Manulife Investment Management is committed to providing quality investment products and services.

Segregated fund contracts combine the growth potential offered by a broad range of investment funds with the unique wealth-protection features of an insurance contract. Through Manulife segregated fund contracts, investors can help minimize their exposure to risk through income, death, and maturity guarantees; potential creditor-protection features; and estate-planning benefits—all from a single product or insurance contract.

Guaranteed interest accounts (GIAs) offer competitive rates plus investment options. Investors benefit from a guarantee on their principal investment, and from several different investment options that can diversify and add flexibility to their portfolio. GIAs can be an ideal solution for conservative investors who are looking to help grow their wealth but concerned about minimizing risk.

Investment loans are available for Manulife mutual fund accounts and Manulife segregated fund contracts and offer interest-only or principal-and-interest payment options.

1 Dividends paid by public corporations qualify as eligible dividends and are included at 138%. Non-eligible dividends are included at 115%. 2 Taxable percentage approximated for a 65-year-old female. 3 Taxable percentage in year one, grows to 20% in year 10; assumes a 5% rate of return on an investment of $200,000; doesn’t take into account year-end distributions or allocations. 4 Regular Series T distributions are expected to be all or principally return of capital, which isn’t taxable until the adjusted cost base falls to zero, at which point it’s taxable as capital gains—doesn’t take into account any potential taxable distributions.

Borrowing to invest may be appropriate only for investors with a higher risk tolerance. You should be fully aware of the risks and benefits associated with investment loans since losses as well as gains may be magnified. Preferred candidates are those willing to invest for the long term and not averse to increased risk. The value of your investment will vary and is not guaranteed; however, you must meet the loan and income tax obligations and repay the loan in full. Please ensure you read the terms of the loan agreement and the investment details for important information. Manulife Bank of Canada solely acts in the capacity of lender and loan administrator and does not provide investment advice of any nature to individuals or advisors. The dealer and advisor are responsible for determining the appropriateness of investments for their clients and informing them of the risks associated with borrowing to invest.

Any amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value. Quick loans, Multiplier and Custom loans are offered by Manulife Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund facts as well as the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

This communication is published by Manulife Investment Management.  Any commentaries and information contained in this communication are provided as a general source of information only and should not be considered personal investment, tax, accounting or legal advice and should not be relied upon in that regard. Professional advisors should be consulted prior to acting based on the information contained in this communication to ensure that any action taken with respect to this information is appropriate to their specific situation. Facts and data provided by Manulife Investment Management and other sources are believed to be reliable as at the date of publication.

Certain statements contained in this communication are based, in whole or in part, on information provided by third parties and Manulife Investment Management has taken reasonable steps to ensure their accuracy but can’t be held liable for such information being inaccurate. Market conditions may change which may impact the information contained in this document.

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MK1379E 06/23

Tax, Retirement & Estate Planning Services Team

Tax, Retirement & Estate Planning Services Team

Manulife Investment Management

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