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 aged 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.
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 (MK1393E).
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 (MK1380E).
- are retired or near retirement
- want to maximize their government benefits.
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 borrowing-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 can help meet specific needs throughout your life. Whether you’re just starting out, accumulating wealth, or nearing/in retirement, Manulife Investment Management mutual funds can give you solutions to help build a portfolio that meets your needs. Manulife Investment Management is committed to providing superior investment products and services so you can enjoy life and worry less.
Segregated fund contracts
For conservative investors looking to grow their wealth but are also concerned about minimizing risk potential, segregated fund contracts from Manulife Investment Management may be an ideal solution. The appeal of these contracts is a combination of growth potential offered by investment funds and the unique wealth protection features of an insurance contract.
Through segregated fund contracts, investors can help limit their exposure to risk through death and maturity, and in some cases, income guarantees, potential creditor protection features, and estate planning benefits — all from a single investment.
Guaranteed Interest Contracts (GIC)
A GIC offers competitive rates plus investment options that include Basic, Escalating Rate, and Laddered GIC Accounts. Investors benefit from consistent returns, as well as several different investment options that can diversify and add flexibility to their portfolio. A GIC can be an ideal solution for conservative investors looking to help grow their wealth but are concerned about minimizing risk.
Investment loans are available for Manulife mutual fund accounts and Manulife segregated fund contracts. Investment loans feature interest-only or principle and interest payments, and no margin-calls due to market fluctuations.
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 Income is considered return of capital until the adjusted cost base falls to zero, at which point it’s considered capital gains. Doesn’t take into account year-end distributions.
Borrowing to invest may be appropriate only for investors with 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 your loan and income tax obligations and repay the loan in full. Please ensure you read the terms of your 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.
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.
The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.
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