Ed Rempel (CFP/CMA) is back!  This article will pit the new Tax Free Savings Account (TFSA) against the old school RRSP with the main focus being the potential GIS/OAS clawback during retirement.

“The future ain’t what it used to be.” – Yogi Berra

Tax Free Savings Accounts (TFSA’s) were just announced in the recent federal budget. At first, it seemed they would be not nearly as useful as RRSP’s since there would be no tax refunds for contributing. However, we are starting to analyze TFSA’s and it seems they beat RRSP’s most of the time. Credit Stephen Harper for implementing what may eventually become the most effective retirement savings vehicle for many (perhaps most?) Canadians, as well as a very useful tax saving tool.

To understand why TFSA’s will beat RRSP’s as a retirement savings vehicle for many Canadians, we first need to understand income tax on seniors.

TFSA’s appear to be almost exactly the same as RRSP’s, except without the tax refund on contributing and tax on withdrawals. Therefore, to determine whether TFSA’s or RRSP’s are better for you depends mainly on your tax bracket when contributing (during your career) vs. your tax bracket when withdrawing in retirement.

A common part of retirement planning and one of the main benefits of RRSP’s includes the assumption that most Canadians will be at lower income tax rates after they retire than they are during their working career. This may sound logical, but it is often not true. In fact, on average, when you include clawbacks on several programs for seniors, income tax rates on seniors are almost 50% higher than on adults under 65!

Our Canadian outlook of always looking after the have-nots has led to quite a few benefits for seniors that are clawed back based on income. The idea is that those with a lot of income do not need the tax relief. The end effect, however, is very high rates of income tax on seniors.

The 3 main Clawbacks that affect seniors are clawbacks on the Guaranteed Income Supplement (GIS), the age credit and on Old Age Security (OAS). GIS is a supplement of up to $7,608 of tax-free income paid to seniors with an income under $15,240. Essentially, for every $2 of taxable income, the GIS is reduced by $1. The age credit is a tax credit of $5,177 that is reduced by 15% for any dollar of income above $30,935. Maximum OAS is a taxable income of $6,028 that is also reduced by 15% for incomes above $63,510. (The OAS clawback is not quite as bad, since we at least get credit for the income tax we would have paid on the OAS.)

There are also clawbacks that apply to adults under 65, such as employment insurance and the child tax benefit, but none of them apply to everyone at any given tax bracket.

When you add the clawbacks that affect seniors, here are the approximate marginal tax brackets in Ontario for adults under 65 vs. seniors. The marginal tax rates apply to everyone, while the tax rates with clawbacks apply specifically to anyone 65 and over.

(Click for larger image)

Here is an updated table for 2010 that fixes a few errors.

Note that the average tax rate on seniors up to $121,000 on income (the start of the top tax bracket) is 45%, compared to 32% for adults under 65. This is a difference of 13% of income, or a total of 43% higher tax to pay for seniors!

Note also that seniors making under $15,000 or over $37,000 are almost all taxed higher than the top tax bracket of 46% for non-seniors!

The lowest tax rates for adults under 65 are on eligible dividends. In fact, the tax rates are negative at a few tax rates, but this is now being eliminated by 2010. The latest budget has increased income tax rates on dividends, which appears to increase them to no lower than 0% at any income level. So the marginal tax rates on most dividend income will be a bit higher than on this chart by 2010.

The lowest tax rates for seniors, however, are on capital gains. This is because the clawbacks are on taxable income – which is only 50% of capital gains but is 145% of dividends. For example, for seniors with no other income, the 50% GIS clawback is only a 25% clawback on capital gains income, but is a 73% clawback on dividend income.

Is there logic to these tax rates? Why should dividends have the lowest tax rate for adults under 65 who are building retirement assets, while capital gains have the lowest tax rate for seniors trying to get an income from their investments? It sounds backwards, but there is some logic when you understand the way CRA structures tax on investment income.

Many Canadians, if they have saved a good nest egg or have a decent pension, may be retiring on incomes of 50-70% of their working incomes. For example, an average Canadian may earn $50-60,000/year during their career, which would put them into a marginal tax rate of 31%. When they retire on say $30-40,000, they would be at a marginal tax bracket of 37% – which is higher than during their working career.

Note that many seniors will be at lower tax brackets in retirement, however. This is because most Canadians, if they have only modest savings for retirement, will likely be retiring with incomes of only $15-30,000/year, which would put them in the lower 22% tax bracket.

All of these tax brackets are adjusted for inflation each year. This means that the income amounts for each bracket will be close to double the figures in the above chart in 25 years.

What does all this mean for the usefulness of Tax Free Savings Accounts (TFSA’s)? That will be the subject of our next article.

photo credit: Marcin Wichary


  1. Traciatim on March 12, 2008 at 10:17 am

    Wait now, isn’t that chart a little misleading? Say for instance you make 20000 in retirement from interest income your GIS clawback will be 7608, or 38% of your income, and also you will pay around 2250 in income tax, 11.25%, making the total percent of your income ‘lost’ to tax at just shy of 50%, not 22% like the chart describes. Am I maybe reading something incorrectly?

    This argument I always find a little distasteful however. The same thing could be said about anyone making 40K a year and supporting a family. They are giving up social assistance, a pile of child tax benefits, assisted housing, and all sorts of other social benefits . . . so why bother working?

    [P.S. it’s because relying on society to pay your way is no way to live at all, just in case there is any confusion here].

  2. FourPillars on March 12, 2008 at 10:59 am

    Interesting way to look at it.

    I’m of the opinion that the effects of the OAS clawback are greatly exaggerated – you need to have an individual income of $63k to START the clawback and I think you need to make about $100k for the complete OAS clawback. Considering you can share pension income if you are over 65 then most couples would need an income of more than $126k (in today’s dollars) to start getting clawed back and $200k for the complete OAS clawback. I can tell you that’s not going to be my situation.

    I think if you are going to get a good defined pension in retirement, then the OAS clawback might be a consideration and the TFSA is probably a better choice than the RRSP since you might not have much rrsp room left anyways.

    I would argue that the majority of Canadians who DON’T have a good DB plan are better off maxing their rrsp first. The exception might be someone who is literally saving “too much” for their retirement ie someone who just wants to keep working.

    GIS is a different kettle of fish altogether – it’s not an issue about whether rrsp is better than tfsa since for someone who is low income, contributing to an RRSP is a poor choice regardless of whether they have a tfsa to use or not. For a low income saver, the tfsa will be a good tool since it will eliminate the tax drag of a non-registered account which is currently their best option.


  3. Peter @ Plan Your Escape on March 12, 2008 at 12:05 pm

    I’ve always felt that if I end up getting some of these social benefits clawed back then I’m likely already doing alright in other areas. If my biggest concern upon retirement is that I’m earning too much income, then I’ll consider myself in pretty good shape.

    I do like the TFSA though. Simple and effective especially for lower income earners as FP states above.


  4. Telly on March 12, 2008 at 12:13 pm

    Great comment Mike. You made many of the points I was planning to make (but probably more eloquently ;) ).

    I also think Traciatim’s comparison to giving up social assistance during working years is valid here. Do I feel bad that various forms of government assistance are not available to senior couples with > $120k / yr income? Not really. But this is why it’s important to plan ahead and project your income in retirement. If my husband and I plan to have $100k / yr in retirement and end up with $130k with some benefits clawed back, I surely won’t complain.

  5. Mike on March 12, 2008 at 12:23 pm

    I find people seem to forget something when comparing RRSP vs TFSA and that is current cash. By “current cash” I mean cash available to me now (or in the very short term). If I put $5000 into my RRSP I get about 1500 back on my tax return. I can then take that $1500 and buy my groceries or roll into the next years RRSP or spend it on “current expenses”. Sometimes, even though it will cost me future dollars, I ~need~ current cash (like I currently need $55k for a downpayment on a house). In those cases maybe a RRSP is the best way because it enables you to save more now… continuing the example from above.. to “invest” $5000 into my RRSP will cost me $5000 – $1500 (refund), or about $3500 of current cash. If I only want to give up $3500 of current cash, I can only put $3500 (no refund) into my TFSA…

    What do you guys think about this comparison?


  6. FourPillars on March 12, 2008 at 12:46 pm

    Telly – I agree – planning is the key and if I end up paying a bit of oas clawback then I won’t be crying for very long… (unless they are tears of joy).

    MikeG – I think that is the correct way to look at it – pretax money in the rrsp, post-tax money in the tfsa.

    One of the changes in my situation that the TFSA might cause is for me to have a proper emergency fund. I’ve posted numerous times about how I think having a line of credit is a better emergency fund than a pile of interest-generating cash which is getting taxed at your marginal rate. Once the TFSA goes through then I think I will change my strategy and start saving in a TFSA which will be an emergency fund/car buying/vacation/big tv fund.


  7. FrugalTrader on March 12, 2008 at 1:58 pm

    MikeG, note that spending the RRSP tax refund significantly reduces it’s long term benefits. If the RRSP refund is spent every year, I believe the TFSA would win every time.

  8. nobleea on March 12, 2008 at 2:00 pm

    I think it depends if you expect OAS and GIS to be around when you retire.

    But I still have a problem equating clawbacks with tax. Money you didn’t earn is not the same as money you had to pay out.

  9. Cheap Canuck on March 12, 2008 at 2:15 pm

    I have to believe there will be some tweaking done over the years to ensure that those with large TFSAs will not qualify for the GIS. Any form of social assistance should be for the truly needy, and IMHO shouldn’t be applied to a calculation for those who would have substantial amounts of money in either RRSPs or TFSAs.

    As FP noted above I think the TFSA will make an excellent emergency fund. Also, once your contribution room has grown it will be a great way to tax shelter income made from lump sums like inheritances, home downsizing etc.

  10. Mike on March 12, 2008 at 2:30 pm


    Can you please explain how/why spending the RRSP tax refund reduces the long term benefits? Not to say you’re wrong, just to say that I dont get it..


  11. FrugalTrader on March 12, 2008 at 2:46 pm

    MikeG, I don’t have the numbers in front of me, but if you visit Preet’s site or read his book, you’ll get all the calculations there.

    To explain it in words:

    tax return
    -compounds tax free
    pay taxes on withdrawal

    no tax return
    -compounds tax free
    no tax on withdrawal

    So if you take away the tax return advantage (by spending) of the RRSP, the TFSA will have the bigger advantage as no taxes are paid on withdrawals.

    To basically summarize Preet’s findings, RRSP’s are one of the best ways to save for retirement PROVIDING that all of the RRSP tax return is used efficiently (reinvested, debt etc).

  12. Telly on March 12, 2008 at 2:50 pm

    FT, if someone is maxing out their RRSP by making regular contributions, they can feel free to spend their tax refund (or use the TFSA) since that money can not be re-contributed anyway.

    Mike, I was thinking we’d use the TFSA for the same reasons you gave (although we won’t need it for a big tv as we’ll be using the tax refund to purchase that next week ;) ).

    • FrugalTrader on March 12, 2008 at 2:58 pm

      Telly, I believe the studies showed that the refunds should be used “efficiently”. Meaning either re-contributed to the RRSP or used to pay down debt. If the refunds were “spent”, then investing in a non-registered portfolio came close.

  13. FourPillars on March 12, 2008 at 3:04 pm

    I think you can use the refunds for any kind of savings (TFSA anyone?) and the rrsp will come out ahead.

    FT is right tho – if the refund just disappears then there is no advantage to the rrsp.

    Telly – I noticed the Habs are in first place in the east, which I didn’t realize. They will look good on that new tv.

    Oddly enough I haven’t looked at the standings for a while.. :) (Leaf fan)

  14. Telly on March 12, 2008 at 4:22 pm

    If an RRSP refund is “spent” but you are in a lower marginal tax bracket in retirement than you are when you make the contribution, you are still ahead by investing in a registered account, even if you blow the refund on a big tv.

    Mike – the Habs beat Jersey last night to move into 1st. The basement is about 2 weeks away from completion so perfect timing for playoff hockey on a 50″ HD TV. Yeah, it’s pretty splurgy but sooo worth it. :)

  15. The Financial Blogger on March 12, 2008 at 11:19 pm

    FP, the majority of Canadians can barely think of saving 2K per year into a RRSP. Therefore, they will not even get closed to get to the TFSA.

    However, for those who are financially aware, they will probably have a good pension plan, RRSP and more money aside. Those are the one who should be concerned about the OAS clawback. 63K as a retirement income is not that much any more… for some people ;-)

  16. Sarlock on March 12, 2008 at 11:54 pm

    I am going with the assumption that by retirement time, the funds in my TFSA are going to impact my ability to receive GIS/OAS benefits.

    Still, I will be maxing out my TFSA before I put funds in to RRSPs. The TFSA allows a lot more flexibility than an RRSP does and at my tax bracket, I will likely be withdrawing my RRSP at the same rate that I am putting it in. This is also based on the expectation that my income level will increase (above inflation) as I move further in my career, pushing me to a higher bracket and making RRSPs the more advantageous investment.

    If it does turn out that GIS/OAS are not clawed back on TFSA money (or only partially clawed back), then I will end up much farther ahead than if I used an RRSP first.

  17. CheapCanuck on March 13, 2008 at 1:28 am

    Sarlock – Don’t be so sure that you will be withdrawing your RRSP at the same tax rate you are contributing. Even if you are in the lowest income bracket, unless you have income from another source (eg: defined benefit pension plan) your tax rate on withdrawal will likely be lower than your MTR on contribution. If you contribute to your TFSA, you’d have to be making less than approximately $17,000/yr in order to pay less than MTR on that money.

    The TFSA is certainly a more flexible savings vehicle (in its currently proposed form), but the RRSP is still superior as a retirement savings vehicle in almost every case. Not only will you come out ahead after tax in the RRSP scenario, but the increased PITA factor of early withdrawals from an RRSP vs. from a TFSA will reduce the temptation of dipping into that money before retirement.

  18. Ed Rempel on March 13, 2008 at 10:12 pm

    Hi Traciatim,

    These tax rates are marginal tax rates – not average tax rates. They are the tax rate on the next dollar of income.

    Your example of 50% of income being paid in tax by someone with an income of $20,000 is right, but if they make $1 more, they will only pay 22% of that dollar on tax.

    You are right that not qualifying for GIS is not really relevant for someone making $40,000. But GIS is very relevant for someone making $15,000 who will lose $.72 of the next $1 of income.


  19. Ed Rempel on March 13, 2008 at 10:23 pm

    Hi Cheap Canuck,

    We would be surprised to if withdrawals from a TFSA would ever affect GIS or OAS clawbacks. TFSA’s were designed to be a certain amount of investments that we can invest with no tax on the profits. Therefore, they are more like a tax-free non-registered investment than like an RRSP without tax consequences.

    If TFSA withdrawals would ever affect clawbacks, then the principal related to any withdrawals from non-registered investments would logically also have to affect the clawbacks.


  20. Ed Rempel on March 13, 2008 at 10:49 pm

    Hi again Cheap Canuck,

    I don’t understand your post 18. If you are in the lowest tax bracket now of 22% (lowest other than 0%), there are no lower tax rates for seniors.

    If your income now is under $37,000, then you are probably in a 22% marginal tax bracket. After you retire, you may well be in the $15-31,000 tax bracket and still be at 22%. However all other tax brackets for seniors, whether lower than $15,000 or higher than $31,000 are all higher than 22%.

    We agree with you about the flexibility of TFSA’s may make them less effective for retirement savings for many people, if they would be more likely to raid their retirement fund for current spending if it is in a TFSA.


  21. CheapCanuck on March 14, 2008 at 1:55 am

    Ed – I came up with my numbers by plugging some arbitrary info into the income tax estimator at:


    I simulated a couple who had managed to save $125,000 each in their RRSPs while contributing in their earning years at a 20.35% MTR (BC MTR for 2008 tax year for someone earning say $30000 a year). Assuming a safe 4% rate of withdrawal, their yearly pension from RRSP is $5000.

    For Tax Year 2008 in British Columbia I entered the following numbers:

    Age 65-69, married.
    OAS field fills automatically – $6070 each
    CPP field – $6000 each
    Eligible pension (RRSP Withdrawal) – $5000 each
    Total income – $17070 each
    Total tax bill – $176.82 each

    Even if you attribute the entire tax due to the RRSP withdrawal, the tax rate is only 3.54%

    I’ll admit I’m far from an authority on the subject, and I may be applying faulty logic (or the tax estimator may be providing incorrect results), but it seems the 20.35% Tax deduction on contribution vs. 3.54% tax on withdrawal (RRSP Scenario) would beat the guaranteed 20.35% deduction you’d face by contributing to the TFSA.

    If this is incorrect please let me know as I am currently in that 20.35% tax bracket and I’m using these calculations to try to figure out the best strategy for allocating my savings over the coming years :)

  22. WhereDoesAllMyMoneyGo.com on March 14, 2008 at 11:28 am

    Thanks for the link FT! Have a good weekend. :)


  23. Traciatim on March 14, 2008 at 4:47 pm

    CheapCanuck, what you’re missing in the calculation is that the GIS clawback starts at dollar one, So the $5000 withdrawal from the RRSP will incur a $2500 clawback from the GIS and the 3.54%. Calling the loss of your GIS a tax is kind of low, as you can see above I count this as the same as counting your loss of social assistance as a tax for working.

    Of course, this doesn’t help people that are currently 65+ and want to adjust their incomes from money in their RRSPs, but people who are younger can start planning now to have income from a TFSA that won’t effect these benefits until the rules get changed.

  24. CheapCanuck on March 14, 2008 at 5:25 pm

    Traciatim – I agree that calculating the GIS clawback as a “tax” is definitely a grey area. Below is a new set of calcs that will take the GIS clawback out of the picture, but still produces an income tax rate on RRSP withdrawals of below MTR:

    Take the same couple, and assume they worked their whole lives, so they each have CPP near the max, but the same $125,000 each in their RRSPs.

    $6,070 OAS each
    $10,000 CPP each ($20,000 income between them puts them out of reach of GIS before any other pension income is factored in.

    total tax on this income is $326.82 each

    Add $5,000 each in RRSP pension income
    total tax bill is now $990.82 each

    Thus the tax attributable to the $5,000 from the RRSP withdrawal = $664 or 13.28%

    Still well below the 20.35% MTR on contribution, with GIS clawback now out of the picture. Age amount is not affected, and they are obviously nowhere near the income needed to trigger OAS clawback.

  25. CheapCanuck on March 14, 2008 at 5:54 pm

    Adding in some dividend income could drop this rate even further (in 2008 in BC).

    Scale the CPP back to $6000/yr each
    OAS still at $6070 each
    RRSP withdrawal $5000 each
    $5000/yr each in dividends

    Total tax bill on this income is now $0!
    You can’t attribute more than the total tax bill to the RRSP withdrawal, so the effective tax rate on withdrawal is 0%

    The scaling back of the dividend tax credit over the next few years will reduce this benefit in the future, but here in BC at least the net tax on dividends at this income level will still remain in the negative.

  26. Ed Rempel on March 15, 2008 at 3:28 am

    Hi Traciatim,

    I think it is entirely fair to consider the GIS clawback to be a tax. Your comparison with social assistance (welfare) is not the same at all.

    GIS is a universal program that applies to everyone over 65 in that tax bracket. It is part of the OAS program that is clawed back on your tax return. GIS would also be clawed back on the tax return, except that it is not taxable.

    Welfare, on the other hand, requires that you apply, dispose of most of your assets and jump through hoops. You can’t get it just because you earned no income for a year.


  27. Ed Rempel on March 15, 2008 at 3:48 am

    Hi Cheap Canuck,

    Your tax rate percentages are not an apples to apples comparison because you are comparing marginal tax rates now while you work with average tax rates after retirement.

    The 20.35% rate is approximately the lowest marginal tax rate in BC for those under 65, while the 3.54% rate is the average tax rate.

    There is a lot of common betweent these 2. Marginal tax rates are the tax on the next dollar of income, while average tax is just your total tax divided by your taxable income. The average tax rate is the weighted average of all the marginal tax rates.

    For tax planning, marginal tax rates are far more important because that is how much more tax you will pay on a bit more income or how much less tax you will pay if you add a tax deduction, such as an RRSP contribution.

    You are getting low tax amounts because the age credit and pension credit kick in. My tax table above is not completely accurate in that the amount a senior can make with no tax (other than the GIS clawback) is $16-17,000, once you include the age credit and the the pension credit.

    However, the GIS clawback would apply in all your examples. It applies to income up to $15,240, but OAS is not included in that calculation. So, if you get the maximum oAS, then the clawback applies to income up to $21,192.

    For example, in your last example, the $6,000 CPP and $5,000 RRSP total only $11,000, so the GIS clawback still applies. If you then make $1,000 of dividend income, you would lose $720 of GIS, so you are in a 72% marginal tax bracket for dividends. They are clawed back at 50% on the dividend after grossing it up by 45%.


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  29. CheapCanuck on March 15, 2008 at 10:37 pm

    Sorry Ed. I was under the impression that a couple could only earn about $20,000 between them and still qualify for GIS (read that somewhere in the Q&A section of Gordon Pape’s website). Since the couple in my last example made $22,000 between them before OAS or RRSP withdrawals I thought that the RRSP withdrawal would have no bearing on a GIS clawback calculation.

  30. Ed Rempel on March 16, 2008 at 12:46 am

    Hi Cheap Canuck,

    Actually, you are right. I was looking at the individual clawback threshold of $15,240, but the threshold for a couple is only $20,112. I verified your figures as well and yes, the couple in your post 27 would pay less than $100 tax.

    They have just enough taxable income from the CPP, OAS & RRSP to be tax free. This is $17,000, which is the total of the personal, age & pension credits. They are also in the window with income between $21-31,000 where the marginal tax rate is low and the dividend marginal tax rate is still negative.

    Your point is well taken, but this would only apply to people in that narrow band of income – which is quite a few people.

    Incidentally, if they were doing the SM and had some interest deductions, they would still qualify for the GIS. This is especially true if they had capital gains instead of dividends (because of the gross-up).


  31. CheapCanuck on March 16, 2008 at 5:47 am

    Yes, it definitely requires some longterm planning to try and position yourself to be able to draw the money out at a much lower rate than you were refunded upon contribution. Why I like the RRSP is that it gives you the flexibility to accomplish this, where the TFSA doesn’t because you’ve already paid the MTR up front.

    As you point out this income window can be pretty narrow for seniors when potential clawbacks are taken into account, and hitting that window could be tricky.

    However, the situation is much simpler for those in a position to retire early, and their RRSP withdrawals will be their only income source until OAS and CPP kick in later. They can withdraw ~$10,000 each without paying any tax at all.

    It is definitely a mind-bender trying to come up with the most tax-advantageous strategy. Ideally, I guess it would be to contribute to the RRSP, retire early, and somehow melt down the RRSP into a TFSA (at a withdrawal rate lower than MTR) before age 65, so as to face no clawbacks. How to accomplish this scenario I have no idea. Anyone else out there got the recipe? :)

  32. Quentin DSouza on March 16, 2008 at 11:01 pm

    I have been reading “The Pension Puzzle” by Bruce Cohen and Brian Fitzgerald which has really helped me to understand many of the components that we are talking about in this post and comments. Of course it does not include the TFSA but it was a good grounding for me in this topic. Looking forward to the next edition with the TFSA which I will buy, instead of borrow from the library.

    I’m not sure about some of the comments. I understand that you may feel you are doing well financially and losing out on funds through clawbacks is okay because you feel you are doing well. How very Canadian of you. For me, if I can avoid any clawbacks by rearranging my accounts in a different fashion and absolutely legally, while still maintaining the same investments, why wouldn’t I do so. I have many years of compounding to come before I retire.

  33. Ed Rempel on March 17, 2008 at 12:39 am

    Hi Quentin,

    Right on. There is no practical difference between a tax and a clawback.

    It is exactly the same if our client pays tax or has a benefit clawed back. In both cases, they have lost money. If we can arrange their finances differently so they can either reduce tax or reduce a clawback, that’s what we will do.


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  35. Tax Resource on April 2, 2008 at 2:28 pm

    I think it’s a bit misleading to say that the “tax” is higher for seniors given the clawback. What the article fails to mention is that seniors are receiving a benefit that non-seniors do not receive. So are we as younger Canadians being short changed? No we’re not. The trust is that as income rises through retirement, these befits should be rolled back to ensure those who do not need them do not receive them. I agree it does not always work as planned but the article is still mis-leading.

  36. Ed Rempel on April 2, 2008 at 3:28 pm

    Hi Tax,

    You are technically right. We just look at what works best for our clients, though. If they would use a TFSA, then they may get more government benefits than if they used an RRSP, so if that is true, then the TFSA would be a better choice for them.


  37. Gemini on April 10, 2008 at 3:59 pm

    I am 62 and my husband is 65. Can i use his age credit to reduce my tax bill??

  38. JR on April 10, 2008 at 6:38 pm

    Gemini asked

    [/Gemini] | April 10th, 2008 at 3:59 pm
    I am 62 and my husband is 65. Can i use his age credit to reduce my tax bill??

    please see


  39. Cannon_fodder on April 10, 2008 at 6:55 pm


    I still haven’t quite figured out how the GIS clawback works and how punitive it is.

    For example, if I collect an OAS of $5,000 and CPP of $7,000 and no other income, will I receive a GIS of $7,608 – 50% x ($5,000 + $7,000)? Is there a good online GIS clawback calculator or discussion that talks about how to minimize this effect?

    I’m thinking if it is possible, better to plan for it now rather than wait until it is retirement time.


  40. Sam the Man on May 26, 2008 at 3:36 pm

    I see some real problems with the marginal percentage rates in the table and I think it needs some reworking. There is no doubt that phaseouts and clawbacks result in some bizarre marginal rate calculations, plus they introduce philosophical questions regarding whether we’re talking taxes or welfare, as hashed out above. Even if the table were right, it’s still a simplification because of other effects not considered, such as GST credit eligibility or an impact on other programs like medicare and its ancillaries. In BC, for example, where there are monthly medicare premiums and a pharmacare program, and penalties (whether you consider them taxes or subsidies to those with lower incomes) that become onerous as soon as your income is $20k+, the calculations are complex and the results can be brutal.

    For an example of where the table is wrong, consider the age credit phaseout for a person with $40k in pension income (and $6k in OAS). The table says the marginal rate on pension or interest is 46%. Plug those numbers into the Harder calculator and you will find that the marginal rate in Ontario is 34.3%. That’s higher than the normal 31% for that sort of income in Ontario but not ridiculously higher.

  41. Ed Rempel on June 4, 2008 at 1:03 am

    Hi Cannon,

    You are basically right. The GIS maximum for a single person is $7,608 and is reduced by 50% of taxable income. OAS income is excluded for any GIS calculation, though.

    To calculate it, check out Service Canada’s table:



  42. Ed Rempel on June 4, 2008 at 1:10 am

    Hi Sam,

    Your comments are well said. I simplified this table. In actual fact, there are about twice as many small marginal tax rate brackets, but I tried to put just the major brackets to keep it more simple. The figures should be very close, though.

    There are all kinds of factors that may or may not affect different people. I have included only the government factors that apply to everyone. If there are any other factors that you think should be included, I would gladly publish expanded tables.

    My main point is that surprisingly many seniors will be in higher tax brackets than during their careers. I think this trend will continue in Canada where we constantly try to support lower income people in every program.


  43. ConservativeInvestor on November 3, 2008 at 11:08 pm

    I was wondering which plan in which to place $5,000 each year. Here is the results of an Excel comparison. The RRSP after tax column represents what is left if the money is taken out at the age 66 MTR. This analysis is challenging my long held belief of RRSP-good, Savingings Accoun-bad.

    The bright ray is that the new TFSP is not dependant on the post retirement MTR! (maybe it’s time for my non-employed wife to start transferring her RRSP to TFSP, $5,000 per year!)

    MTR 0.43
    Interest 0.035
    MTR at 66 0.46

    Year Invest RRSP RRSP TFSP Bank
    after tax Account
    0 5,000 7,150 3,861 5,000 5,000
    1 5,000 14,550 7,857 10,175 10,100
    2 5,000 22,210 11,993 15,531 15,301
    3 5,000 30,137 16,274 21,075 20,606
    4 5,000 38,342 20,704 26,812 26,018
    5 5,000 46,834 25,290 32,751 31,537
    6 5,000 55,623 30,036 38,897 37,166
    7 5,000 64,720 34,949 45,258 42,907
    8 5,000 74,135 40,033 51,842 48,763
    9 5,000 83,879 45,295 58,657 54,736
    10 5,000 93,965 50,741 65,710 60,828
    11 97,254 52,517 68,010 62,042

  44. cannon_fodder on November 4, 2008 at 1:30 am


    It is a commonly held belief that if you withdraw funds from your RRSP at a higher MTR than the funds went in, then it is not a good plan.

    If you are going to withdraw money from your RRSP at an MTR, not average, of 46% then that means you have a lot of other income. In Ontario you’d be at about $65,000 of income to get around that MTR but your average tax rate would still be under 25%. Getting $65,000 of income in today’s dollars before you even tap into your RRSPs/RRIFs would be a nice problem to have for a lot of us!

  45. Ed Rempel on November 4, 2008 at 2:23 am

    Hi Conservative,

    I don’t understand your point. Why did you show the TFSA at $3,861 in year 1, instead of just at $5,000?

    The MTR when you withdraw vs. when you contribute are both completely relevant in comparing the TFSA to RRSP.


  46. Ed Rempel on November 4, 2008 at 2:34 am

    Hi Cannon,

    If you are over 65 when you withdraw, you are over the 46% MTR at $37,000 or over and at $15,000 or less. Both are not very high incomes.

    You are right though that there are other factors in determining whether RRSP’s are a good plan. There is also the the advantage of tax-free compounding. TFSA’s have that too, but only to $5,000/year.


  47. ConservativeInvestor on November 5, 2008 at 12:48 am

    The columns were not maintained when I pasted excel into the box so it’s hard to get the meaning. On reflection, I had not included the original RRSP tax deduction in next year’s RRSP contribution so the RRSP total after 10 years was understated. After the corection, the RRSP beat the bank account, but lagged a bit behind the TFSA. The 46% MTR rate for after retirement came from the table shown near the top of the page for the 37-63 income range. I am assuming that the RRSP will be taken out as needed at the MTR.

  48. cannon_fodder on November 5, 2008 at 5:52 am


    I understand your point and I’m slowly coming around to look at MTR that includes clawbacks from handouts I may never get.

    Perhaps you could offer some insight as to why the age credit seems to be lost in the discussions around CPP, OAS and GIS. Even CRA’s retirement calculator doesn’t mention the age credit.

    Google can come up with all kinds of pages mentioning CPP, OAS and GIS but age credit gets short shrift.

    Is there some caveats that aren’t obvious (like it is not expected to be there as baby boomers start drawing from the tax coffers in record numbers)?

  49. Ed Rempel on November 6, 2008 at 12:59 am

    Hi Conservative,

    The bottom line with your example is that if your tax bracket is 43% while you work but 46% after you retire, then the TFSA is better for you than RRSP’s.


  50. Ed Rempel on November 6, 2008 at 1:29 am

    Hi Cannon,

    Good point. I don’t know why there are not more articles about the various clawbacks, especially the age credit. I have not looked at CRA’s calculator.

    The “caveat” here is that clawbacks are starting to proliferate. I only included the main tax clawbacks that apply to everyone above, but there are a variety of other benefits for specific types of people or provincial clawbacks that make their tax rates even higher.

    For example, Ontario just announced a property tax credit for seniors of $250 that is clawed back at 2%.

    Many seniors in retirement homes have their rent subsidized based on income. I have met people in 120+% tax brackets because their rent subsidy is reduced by 50% of any additional income, plus the GIS clawback and of course, the 22% income tax. For them, getting a GIC with a higher rate is bad for them.

    This seems to be part of the Canadian Psyche. We like to provide all kinds of benefits for lower income people, but then don’t want it to go to people with other income – so we create a clawback.

    As the baby boomers retire, my guess is that clawbacks will proliferate. The total of clawbacks plus income tax for many of us baby boomers may become shockingly high.


  51. cannon_fodder on November 6, 2008 at 6:09 pm


    Well, it appears that with the CPP, OAS and age credits, one could easily see around $21,000 from the government at 65. With both spouses collecting that much, that would be enough for many people to retire.

    I don’t know how to calculate the taxes on that since taxtips.ca doesn’t seem to have a place for the age credit (unless I include that in “other income”).

  52. cannon_fodder on November 6, 2008 at 8:44 pm


    Never mind. I see that the age credit is a tax credit, not an actual benefit paid out from the government. THAT is why it is not spoken of too much.

  53. […] Opportunity for non-registered portfolio rich seniors to move their dividend paying stocks into a TFSA to prevent OAS reduction. […]

  54. Barbcgf on January 9, 2009 at 10:52 pm

    I keep reading that the clawback rate on GIS is 50% of taxable income. When I look at the figures in the Service Canada table:


    I see that for an $816 increase in taxable income, the monthly GIS payment is reduced by $17. That would be an annual clawback of $204 which is 25% of the taxable income.

    Am I missing something?

  55. Ed Rempel on January 11, 2009 at 6:10 pm

    Hi Barbcgf,

    I’m not sure what you are looking at, but the clawback is 50%. Are you looking at the GIS for a couple where the difference is reduced from both of them?


  56. cannon_fodder on January 11, 2009 at 11:43 pm


    When you look at the annual income tables for combined couples, the table then gives you the monthly GIS for EACH person. Thus, if your combined annual income was $0 to $47.99 the monthly GIS for each person would be $430.90 while if the combined income was $816.00 to $863.99 the monthly GIS would be $413.90 meaning that the couple loses out an extra $17 x 2 (each person) x 12 (months) = $408 or 50% of the increase in income.

  57. Barbcgf on January 15, 2009 at 3:32 pm

    Thanks, cannon_fodder
    My question came at the end of a long day of spreadsheets and tables mapping out our financial future. I knew it had to be something simple like that – it reinforces our decision to be sure we have drawn out all of our RRSP before we become eligible for the GIS

  58. […] working. If this is true, that would be better for RRSP’s. In the introductory article about clawbacks on seniors, however, we saw that this is often not […]

  59. math person on March 7, 2009 at 11:16 pm

    There are two flaws in the marginal tax rates in the table:

    – the income used for the GIS “clawback” does not include OAS. So income ranges should be increased by OAS amt (ie clawback doesn’t start at zero income, but at around 6000, assuming GIS recipient also gets OAS, which they should). Top income for GIS clawback needs to be adjusted by same amount for same reason.

    – age amt is not a credit per se. $10,000 extra income –> 1,500 less age amt –> .15 * 1500 less federal tax credit —> $225 more federal tax. Adding a provincial tax credit of another $75 or so, and total tax went up $300. This is a marginal rate of 3%, not 15%!

  60. […] Rempel has a great article on TFSA and seniors clawbacks for more details on the topic. If you enjoyed this article and would like to be notified when new […]

  61. sundae1888 on May 31, 2009 at 2:53 am

    Is there a comprehensive OAS/GIS (clawback) calculator similar to the tax calculators found on taxtips.ca?

  62. CanadianInvestor on June 11, 2009 at 12:53 pm

    In the table where do the 10% and 8% numbers under Clawback come from? The text says 15% is the clawback rate.

  63. CanadianInvestor on June 11, 2009 at 1:01 pm

    And how does the OAS clawback tax credit work? How do you get a credit for an amount you don’t receive? Did you already pay tax on it somehow? Is it because the OAS clawback happens through reductions in the following year’s OAS payments, which means tax would have been taken off in the current year?

  64. FrugalTrader on June 11, 2009 at 1:12 pm

    Here’s my article on the OAS clawback.

  65. Carl Anderson on January 15, 2011 at 2:34 am

    The comment #60 by “math person” points out a serious error in the tables for marginal rates. The increase in marginal tax rate caused by clawback of the age amount is much less thatn indicated because the reduction in the tax credit is only a small fraction of the 15% reduction in the age amount. It would be helpfull to correct the tables because it leads to very misleading conclusions for people in the 32K to 75K income range.

  66. Showtime on February 15, 2011 at 7:46 am

    Hi, I don’t think I understand some of the key stats in this article and in the tables. Namely, I don’t follow the GIS clawbacks for low income below $15k and the higher tax rate w/ clawbacks on investments like cap gains and dividends.

    According to Gov of Canada tables (http://www.servicecanada.gc.ca/eng/isp/oas/tabrates/tabmain.shtml), someone w/ an annual income of just $400 is going to get a wayyy higher GIS benefit (and combined OAS/GIS benefit) than someone w/ an income of $15k. Where does the 50% clawback come from?

    From what I see about tax rates (http://www.taxtips.ca/marginaltaxrates.htm), lower income people will always pay less tax on cap gains and dividends, etc. How would people w/ less than $15k income pay more tax on investments? I presume that it has to do w/ the above clawback issue that I don’t get.

    Can someone pls clarify these points for me…and explain the data sources and calculations that support the assumption that someone w/ ~$15k income is going to receive higher/better gov benefits than someone w/ very minimal income? Thx.

  67. cannon_fodder on February 15, 2011 at 10:55 am


    The GIS clawback states that if you had zero taxable income (TFSA income is NOT taxable) you would receive $7,608 (or whatever the max is for that year). If you make $2, the government only gives you $7,607. Thus, whatever form that taxable income is received, you are quickly eroding the benefit of the GIS.

    Now, on the other hand, if you get the GIS it would be typical to think you need it since you have so little taxable income in the first place. The TFSA in a generation or two could change all of that. Some people might build up a very sizeable TFSA and be able to live quite nicely on the TFSA income and the GIS supplement.

    Oh, and just so you know – CPP and OAS are taxable income. So, how do you build up a sizeable TFSA unless you’ve been in Canada awhile? Pretty hard to do that which means you will get some OAS. And, if you are contributing to a TFSA it is also likely you worked at a job where you paid into the CPP.

    I think I remember seeing how small the percentage of government retirement payouts were in the form of GIS payments. It was quite small.

  68. Showtime on February 15, 2011 at 5:58 pm


    Thx for the reply cannon_fodder. I follow the GIS info and it’s basically what I thought. I still don’t see how it supports the author’s rationale. The table shows a blank for gis clawblack over ~$15k (i know the exact cutoff is something more specific), so the chart could be misconsrued as a 0% clawback but it’s in fact a 100% clawback over ~$15k. How can getting nothing (ie no GIS at all) be better than getting something (ie possibly thousands in GIS, regardless of clawback)? I don’t see how the higher tax w/ clawback on investments is calculated either. I presume the clawback is affecting it in someone’s formula but the straight facts say that lower income people are applied a lower tax rate for cap gains, dividends, etc. If the 50% clawback is applied in the modified tax rate, why isn’t the 100% clawback factored in.So the facts tell me that sub-$15k income people get GIS (sometimes much more) and pay less investment tax. I don’t see how the conclusion can be made that that $15k+ people have better benefit and/or tax treatment that sub-$15k people.

    Good points; a lot of those people will have built up OAS eligibility and CPP benefits.

    Anyway, I respect everyone’s research and analysis. I just think it’s important to know which conclusions are irrefutable and which ones are debatable. I believe the author also stated in a diff article that TFSA is better than RSP for 80% of Cdns; I haven’t seen conclusive data that supports that either. That said, the author has many more financial qualifications than me (which is none) so maybe the info just needs to be explained more clearly and I need to understand it better.

  69. Ed Rempel on February 16, 2011 at 12:59 am

    Hi Showtime,

    The GIS clawback applies to income, excluding OAS, up to $15,888. So, for people with maximum OAS (no earnings ever are required), the clawback of 50% applies on all income up to $22,110.

    This is the marginal tax rate, or the tax + clawbacks on the next dollar of income. There is no 100% clawback. Once your income is high enough that you get zero GIS, then there is no longer any clawback.

    The clawback is also on taxable income. So, if the only income you have is $1,000 of investment income, you will pay no income tax, but will lose GIS as follows:

    Interest: Lose $1,000 x 50% = $500 GIS
    Capital gains: Lose $1,000 /2 x 50% = $250 GIS
    Dividends: $1,000 x 1.44 gross-up x 50% = $720 GIS

    My guestimate conclusion that TFSA is probably better for about 80% of Canadians is at: https://milliondollarjourney.com/tfsa-vs-rrsp-best-retirement-vehicle.htm .

    I don’t have stats on how many people are affected by clawbacks or how many people are at similar or higher tax brackets after retiring than before. Therefore my 80% figure is just a guestimate based on people we have seen. We have done financial plans for thousands of families and about 300 tax returns, so we have seen quite a few, but that is not a representative group.

    TFSA would be better for people that spend all or part of their tax refunds, people affected by the larger clawbacks, or people that retire in a similar or higher tax bracket to when they are working. This would include most Canadians, but I don’t know exactly how many.


  70. cannon_fodder on February 16, 2011 at 12:04 pm

    Sorry Ed/Showtime. OAS does not count towards testing for GIS. As for TFSA vs RRSP I’d say there’s a consensus that lower income Canadians should consider maxing their TFSA first and then onto the RRSP. It won’t apply in 100% of situations – but the TFSA is a very welcome initiative.

  71. Showtime on February 16, 2011 at 3:33 pm

    Hi Ed,

    Thx for the reply. I think our viewpoints differ on the concept of “free money” from gov programs and how tax is applied. When I said “100% GIS clawback”, that was basically a figure of speech to imply zero GIS. So my point was that people w/ sub-$15k income would be some GIS (ie “free money”, whether clawed back or not) vs people w/ higher income who would get zero GIS. It could be argued that having more income is better overall but I’m just saying none of it would be GIS.

    I think I follow what you’re saying about investment income and gis clawbacks, ie investment income is increasing a person’s overall income so it is reducing GIS. But a higher income person doesn’t get GIS and is in a higher tax bracket, so that’s kind of 2 disadvantages. So I guess the issue is clawbacks on GIS vs no GIS at all, and lower income but more “free money” vs higher income in general but less “free money”.

  72. obscurans on September 2, 2011 at 9:56 am

    I would like to reiterate math person (#60) and Carl Anderson (#66)’s comments that the age amount clawback is grossly overstated in impact.

    Using the current 2010 tax package for actual numbers, the age amount (line 301) is 6446 maximum, reduced by 15% of income over 32506. This clawback will occur over 6446/15%=42973.3 income, so it applies to people between 32506-75749.3 income.

    However, if you look at Schedule 1 (Federal tax), line 301 is in the section Federal non-refundable tax credits, which means it does not reduce your tax bill dollar-for-dollar: it gets multiplied by the 15% nonrefundable rate at line 338. So the marginal clawback rate due to the age amount is 15%x15% or just 2.25%.

    Concrete example, ignoring anything but the basic and age credits:
    Line 260 (taxable income): 40000 | 40001
    Line 300 (basic credit amount): 10382 | 10382
    Line 301 (age amount): 5321.9 | 5321.75
    Line 335 (total amount): 15703.9 | 15703.75
    Line 350 (total tax credits): 2355.585 | 2355.5625
    S1 Line 36 (federal tax): 6000 | 6000.15
    Line 406 (net federal tax): 3644.415 | 3644.5875

    Therefore the marginal federal tax rate at 40000 income is (3644.5875-3644.415)/1=0.1725/1=17.25%, which is exactly the 15% federal tax rate (bracket goes up to 40970 now) + 2.25% age amount clawback.

    This drastically changes the TFSA landscape, as 2.25% is a negligible amount. The net effect is at the mid-income range (well, until the OAS clawback hits), you will be at a lower post-retirement marginal tax rate if you don’t cross into the same tax bracket as you were at pre-retirement.

    The federal brackets as of 2010 are 15% to 40970, 22% to 81941, 26% to 127021, 29% thereafter. Since the OAS clawback probably hits before 81941, as long as you were working at a 26%+ bracket, post-retirement rate is lower right up to the OAS clawback start. If you were working at the 22% bracket, you can go all the way through the 15% to 40970 and your rate will be lower post-retirement.

    PS: for all the people who have a problem equating a benefit clawback with a tax, think of it as not optimizing your ‘tax rate’, but ‘total amount of money in your pocket after all government economic laws are taken into account’. Then your ‘marginal tax rate’ is ‘total difference in money due to government economic laws divided by (a small) difference in income’.

    Looking at it this way, from 40000 to 40001 income (ignore OAS), you go from 36355.585 to 36536.4125 in your pocket after you take into account the government economic laws. You have therefore lost 17.25 cents of your next dollar, to what we lump into ‘tax’. And that is all that matters.

    Then Showtime, once you have lost all the GIS to clawback, on your *next* dollar of income you will not lose any *more* money of your GIS – you’re already completely out. Thus the *marginal* clawback rate from the GIS is zero. And a higher income person who will never care about GIS is at an *advantage* relative to a lower income person whose next dollar is ‘worth’ an extra $0.50 bill due to lost GIS.

    You are of course completely correct in saying that the higher income person is better off on the whole, but 1. that’s not an apples to apples comparison and 2. it’s not what we’re talking about here. We’re taking a look at if we magically drop a dollar of income into someone’s lap, what *proportion* of that dollar can they legally keep, depending on their current total income.

  73. curious on September 11, 2011 at 2:04 am

    Can anyone let me know if there is any way to avoid the gross up on dividends for someone who cannot use the dividend tax credit because they are non taxable? It reduces benefits such as the GIS as noted above.

  74. Ed Rempel on July 18, 2012 at 1:40 pm

    Hi Curious,

    No, there is no way to avoid the dividend gross-up. You are right that it is very punitive for low income seniors that receive the GIS.

    Our advice is that low income seniors that receive GIS should not invest for dividends. They are taxed at 60-70%.

    There are some corporate class mutual funds that invest in dividend stocks but pay out capital gains that are taxed at only 20-30%, or “return of capital” which you can receive for about 10 years before starting to pay capital gains tax on it.


  75. Rod on March 12, 2013 at 1:53 pm

    For someone that is over 65…. Retired… And have SM implemented…. House paid off and large portfolio thanks to SM… What are the strategies to pay for the loan interest? RRSP meltdown can help to cover some of the interest, but maybe not all of it. To complement it, I thought about using dividends from the loan investment, but those are taxed at 145% depending on the income level. Any thoughts?

    Once one turns 65, would it be more tax efficient to setup a DRIP and sell the purchased shares every quarter? (to benefit of capital gain tax instead of dividend tax)?

    Trying to find a model to “perpetually” pay the loan interest while maximizing income after 65…. Dividend cash from TFSA would be free, but how about the investment loan?


  76. Ed Rempel on March 13, 2013 at 8:57 pm

    Hi Rod,

    That is an excellent question. Interestingly, the Smith Manoeuvre actually works better for low income seniors than anyone else – but it is too aggressive for the vast majority of seniors. Low income seniors are effectively in a 50-70% tax bracket when you include the GIS clawback, so they benefit from the interest deduction more than anyone else, including non-seniors making millions.

    Taking income from the SM takes a lot of planning, though, since there are very low and very high tax brackets – and your tax bracket is mainly determined by how you choose to take income from your SM investments and from RRSPs.

    In your case, Rod, are you in a low or high tax bracket? If you tell me your taxable income before the SM investment income, whether you are married or single, and how much your investment portfolio is, I can give you specific recommendations.

    In general, if you are in a high tax bracket, the lowest taxed types of investment income are return of capital and deferred capital gains. If you are in a low tax bracket, then the lowest tax is return of capital and dividends, followed by deferred capital gains.

    There is an issue with return of capital and deferred capital gains that they can slowly reduce the deductibility of your investment credit line.

    Here are some of the strategies:

    If your income is relatively low (below $23,000 & single), then the interest deduction may qualify you for the GIS. In that case, you want the lowest possible tax on the investments – so you should focus on deferred capital gains and return of capital. This can slowly reduce the deductibility of the investment credit line, but the effect of that is very small compared to the GIS income that you can get. The government in essence pays 50-70% of your interest.

    There is a tiny window if your taxable income including the SM income is between $23-33,000. In that small bracket, dividend income is tax at a -2% in 2012, so you can deduct the interest (only about 20% tax refund), but pay no tax at all on the investment income (or even a small negative tax).

    Once your income is $33,000 or more, then return of capital and deferred capital gains are the lowest tax again, so you probably want to avoid dividends.

    In practice, we usually use corporate class mutual funds and either take a “systematic withdrawal plan” (SWP) or “return of capital” (T8 or T6). They allow you to easily take any amount of income you want, pay it automatically & efficiently to your bank account, and there is almost always little or no tax on the investment income – even when they are growing rapidly and even when you are taking your monthly income from them.

    That does mean we have to calculate the amount of the interest that remains deductible each year, which is a semi-complicated spreadsheet.

    There is a company called Nexgen that has the absolutely perfect tax strategies, but we don’t use them much because none of our All Star Fund Managers are with them. Nexgen is unique, however, since you can get any type of income you want from any type of investment.

    For example:

    – You can get Canadian dividend income from a global equity fund or a bond fund.
    – You can get a monthly payment that is 100% capital gains, so that your entire investment credit line remains tax deductible.
    – You can get 100% return of capital, which means that you can take any amount of income but zero will show up on your tax return (but you have to do the declining interest deductibility calculation).
    – You can take 100% return of capital for 12 years with no tax and then do a tax-free switch to a different fund with exactly the same investments that pays you a 6% Canadian dividend (even though it is a global equity fund).

    Nexgen is amazing, but our advice is almost always that the investment choice must be first. You should almost never take a lower quality investment only for tax reasons.

    That is just an overview of this issue, since it is complex. If you would like a more specific answer for your situation, Rod, then post more details.


  77. Rod on March 14, 2013 at 12:39 am

    Hi Ed,

    Thank you for taking the time to answer this.

    I’m 35 years old, married. Income around $100K, wife not working, 1 kid now, planning the 2nd one. Considering my company’s pension and the time for this portfolio to grow, I’ll likely be on the high income when I’m 65. Trying to figure out how much income I’d have in today’s dollar.

    I’ve been leveraging for a while, so I’m comfortable to start with SM. I now have 50% equity on my house and I read every single post of this site and SM thread from redflagdeals. I’m just looking for an “exit plan” before I begin. I’ve already setup a separate IB account for clean trail with CRA.

    House value is $550K, but recently the rules changed to access up to 80% of equity, with the HELOC increased automatically up to 65% of the value of my home. So the maximum I can start with is $165K. Assuming my current mortgage payment and 5% mortgage rate (for history sake), $300 per month goes to the principal to be borrowed and invested. So in 15 years and growing at 7%, I expect at least a $550K portfolio (if rates keep lower, this will be bigger).

    Like yourself, I’d like to never pay off the loan so I can perpetuate the tax deduction on my income. So I’m trying to figure out how to minimize the taxes since dividends (my main strategy to grow the portfolio until I’m 65) will be so heavily taxed after that.

    Meanwhile, I’ve been maximizing TFSA and contributing some to my RRSP and spousal RRSP to lower my current tax bracket. I’m ok to have a large RRSP, since it will grow tax free until we start to withdrawn it, and after that, at least one of us won’t pay any taxes on that by using the RRSP meltdown strategy to cover the loan interest. But I still might need to complement income to cover any remaining loan interest (if rates are high) and our expenses. We have total RRSP of $130K, and expect to contribute $6,600 per year. So in 15 years and growing at 7%, I expect a $525K portfolio.

    I haven’t researched Nexgen yet. I’ll check their options. Since I do the taxes myself, I guess the easiest way is to use the Nexgen fund for 100% capital gains. My loan remains 100% tax deductible and only 50% of the capital gains will be taxed. Sounds like the most efficient way.

    I have 4 main questions:

    1. When I’m 64 and I sell all the stocks prior to buy these capital gain funds… There will be a big hit for that year, having to pay taxes on the capital gains accumulated on these years, right? I wonder if on that year I should take some of the profit and put in the RRSP to offset the taxes?

    I have an impression that the more I have on RRSP, the better, as I can almost always guarantee to cover the interest (even if they’re high) and not incur income tax with RRSP meltdown? If I convert to RRIF and only withdrawn the minimum, it should cover the interest and generate very little if any income?

    2. To perpetuate even further for my next generations… In Ontario, we can designate a beneficiary for TFSA… can I designate my child even if he’s under 18? If I can’t, what happens to the funds case me and my beneficiary (wife, then) passes away?

    3. What are the tax implications for the SM loan / house to my kids if both my wife and I pass away… Any tax strategy that can be used with a will?

    4. There’s currently $25K on each TFSA, so if I continue contributing $5,000 per year and assume 7% growth, that’s another $195K on each, where dividends can provide at least $10K withdrawn per year easily on each TFSA. TFSA can be withdrawn with no taxes or clawbacks implications, correct? Did the government pass the law for withhold dividend tax on US dividend stocks?

    Thanks so much for taking the time to share such valuable information!

  78. Ed Rempel on March 16, 2013 at 1:27 am

    Hi Rod,

    Wow, I’m impressed by your long term planning! You covered a lot, but here are my comments:

    1. You can start your SM at 80% of your home value. At most banks, the new OSFI rules are an issue when your mortgage is less than 15% of your home value, not when it is between 65-80% of home value.

    2. RRSPs can get too large if they put you into the high tax brackets with clawbacks after you retire. In your case, that is very unlikely, since your wife is not earning and you can contribute mostly or only to her spousal RRSP, and because you have a pension you get less RRSP room.

    3. In the TFSA vs. RRSP debate, in your case, your available investment money each year is probably best used first to maximize your RRSP (since you are in a 40+% tax bracket and will almost definitely be in a lower bracket after you retire – or at least contribute enough to bring your taxable income down to about $81,000.

    4. In the TFSA vs. Smith Manoeuvre debate, in most cases it is more beneficial to use your extra cash to pay down your mortgage more quickly and reborrow to invest than to invest that amount in your TFSA. The TFSA gives you tax-free growth and dividends, but if you invest tax-efficiently, you can usually get tax refunds almost every year from the Smith Manoeuvre. Tax refunds beat tax free. Your dividend strategy would create a bit of tax drag on the SM, since it is less tax-efficient than deferred capital gains, but it sounds like your investments would be tax-efficient enough for the SM to beat TFSA (assuming very little trading to trigger capital gains).

    5. Selling all your dividend stocks at age 64 to avoid the high clawback tax on dividends starting at age 65 might make sense. Without doing a retirement plan and figuring out what your taxable income would be after you retire, you may or may not be in a clawback zone. Remember that the income from your Smith Manoeuvre investments can be favourably taxed as capital gains (or deferred capital gains or return of capital) while you can deduct all of the interest each year.

    6. If it does make sense to sell all your dividend stocks at age 64, you may want to plan around that, such as spreading it over several years to avoid putting yourself in too high a tax bracket, or perhaps changing your investment strategy years earlier. Your idea of saving RRSP room so you can contribute to offset it sounds like a good idea, but you will probably benefit more from contributing to your RRSP earlier.

    7. Successor holders (beneficiaries) for your TFSA must be over 18. However, I believe you can have the TFSA held in trust until your kids reach 18. Are you planning to be over 65 and have kids under 18? :) Good for you, Rod!

    8. If your kids continue the Smith Manoeuvre, it would be tax deductible to them as well. They can keep the investment credit line and the investments. In most cases, though, your kids probably will not want to keep your home and may sell it. If they want to keep the SM going, they would have to refinance the investment credit line to maintain the tax deductible debt. They could do this either by paying it off with a credit line against their own home or by taking out an investment loan to pay it off. They can decide all this after you are gone. Nothing is necessary in your will. All you can do is educate your kids in the strategy and then trust them to make the decision that is right for them at the time.

    9. The reason there is tax withholding on U.S. dividends in your TFSA is that this is not provided in the Canada-U.S. Tax Treaty yet. It is provided for RRSPs, so there should be no withholding in your RRSP, but there is in TFSAs. My guess (and it is a guess) is that governments are slow to negotiate and that in 5 or 10 years they will include TFSAs in future versions of the Tax Treaty to avoid tax withholding.

    10. Your dividend investment strategy is a good strategy. It is the currently popular strategy, so you may want to consider whether or not you want to commit to it until age 64. In the last 20 years, the most popular investment strategy has gone from emerging markets to technology to bonds to income trusts to resources to bonds and finally to dividends. The popular strategy changes regularly. Today it is “anything with a yield”. My guess is that in a few years, something else will be most popular. The most likely scenario is probably a very strong market for the next few years (after the last decade being the worst in 80 years), which would lead dividend stocks to lag for quite a few years. That is just one scenario, but I raise it to illustrate that likely some other strategy, such as growth investing, will be more popular in a few years. The strategy to avoid is to chase the currently popular strategy. Therefore, you should either diversify your strategy now or commit to sticking with dividends even if they lag for many years.

    Just some thoughts to plan ahead. I hope this is helpful, Rod.


  79. Rod on March 16, 2013 at 11:54 pm

    Thanks Ed, this was very helpful. I’ll use your mortgage referral service to get the readvanceable mortgage. I’ll take a closer look on the thoughts provided above. I do use some growth strategies for speculative capital by doing pre-earning plays every quarter using Options. But that’s trading, for short term. I think the dividends provides a good long term investing strategy.

    Thanks again!


  80. Rod on March 18, 2013 at 8:57 am

    Hi Ed,

    You mentioned that deferred capital gains is more efficient tax-wise than simply paying dividend taxes every year.

    Is it possible to implement such strategy with regular dividend paying stocks? How would one choose to defer it? The idea is certainly to hold those stocks for many years, to make it effective.

    As a DIY person, I’m trying to assess how feasible is this option compared to a mutual fund that offers deferred capital gain tax type of class.

    Thank you,


  81. gogernator on April 14, 2014 at 5:39 pm

    RRSP vs TFSA. I have a quick question, my mom is/has retired for all intensive purposes, but wont’ be converting her RRSP for another 8yrs or so. Her current gross annual income is about 20K. Would it make sense to take some of her RRSP money and completely fund her TFSA? If she takes 31K and invests and gets a return of 9% (which would be good going) her investment would have a little less than doubled in 7 years. That 31K would now be worth 56K or so, and be completely tax free. If she has also been investing in securities with a dividend yield in the 3.5% range she will now be able to harvest about 2K per year completely tax free. If on the other hand she leaves it in her RRSP and invests in the same products, at some point she will pay some tax on the accumulated monies.

    As a side note, my moms RRSP is not substantial.

    Your thoughts would be much appreciated.

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