Make Your Retirement Comfortable with the “8-Year GIS Strategy”
The “8-Year GIS Strategy” is one of the best strategies to turn a modest retirement into a comfortable one for you.
I am finally releasing it! For years, this is one of a few strategies that I have quietly used with select clients.
Prefer an overview? Like videos? Listening to podcasts? Check out our whiteboard video, podcast episode or read the full post below!
It has 5 huge advantages:
- $101,00 tax-free cash from the government.
- No income tax for 8 years.
- Allow your CPP to grow by 42% by deferring it to age 70.
- Allow your RRSPs and pensions to grow 8 more years. Invested effectively, they could be 50-100% higher, so the rest of your retirement should be much more comfortable.
- Typically, 25% to 50% higher income through your retirement.
25-50% more income can be the difference between a tight, stay-at-home retirement and a freedom retirement with lots of travel and fun!
To make it work, you usually need 2 things:
- No government pension.
- A plan to have significant amounts of non-registered investments, TFSA, or home equity.
One of the most common reactions I get when I tell people about it is, “Finally something government employees cannot do and the rest of us can!”
I will explain the strategy and the 10 steps to implement it. Stay tuned for my next post with real-life stories of people that did it.
The “8-Year GIS Strategy”
First, a little background. GIS is the Guaranteed Income Supplement, a generous tax-free income of $10,500 per year for single people and $12,600 per year for couples age 65 and over. To get the maximum, you need to have no other taxable income other than OAS (Old Age Security). There is a clawback (additional tax) of 50% of your taxable income (other than OAS) from the prior year, in addition to income tax.
Over 8 years, that is $84,000 tax-free for singles and $101,000 tax-free for couples. You would need to withdraw at least $105,000 (singles) or $126,000 (couples) from your RRSP to give you this much cash flow.
Key point: You have to have no other taxable income. With some effective planning, you can have lots of cash flow that is not taxable income.
You need cash flow – not income! Income is taxable cash flow.
The idea is that you provide for yourself using your non-registered investments and/or TFSA. You could also sell your home (or borrow against it) to get cash flow. You collect the tax-free GIS for 8 years or longer from age 65 until you are forced to start withdrawing from your RRSPs at age 72.
Don’t touch your RRSP and pension. Let them grow for 8 more years. Invested effectively, they could grow 50% to 100% over 8 years, which means the rest of your retirement is far more comfortable.
Tax-efficiency and effective planning are critical to make this work properly, because the clawback is huge! You lose 50% to 70% of every taxable dollar you make. That is 50% clawback and 20% income tax.
10 Steps to Do the Strategy
The 10 steps to implement the “8-Year GIS Strategy” are:
- Plan ahead to have enough investments non-registered and/or TFSA to provide your retirement cash flow for 8 years.
- Retire at age 63 or sooner. Starting January of the calendar year you turn 64, you need to show taxable income of zero.
- Withdraw from your non-registered investments or TFSA the after-tax cash flow you need every year. To avoid or minimize the 50% clawback, use self-made dividends to give you cash flow, by selling a bit of your investments each month. Minimize your taxable income by avoiding taxable investment income, like dividends and interest.
- Apply for OAS and GIS when you turn 64 to start at age 65. Include the Statement of Income to show your expected taxable income.
- Defer converting your RRSPs to RRIFs until the end of the year you turn 71.
- Transfer your pension to a LIRA or locked-in RRSP. Defer converting to an LRIF and do not take any income until age 72.
- Defer CPP to age 70.
- Avoid salary and business income. If you work, volunteer. If you have a business, incorporate and leave all the profit in the corporation.
- Invest tax-efficiently in your non-registered investments. Avoid Canadian dividends completely (70% clawback), and minimize other taxable investment income, such as interest and foreign dividends (50% clawback). Corporate class mutual funds can minimize tax or consider investing with a portfolio manager with tax-deductible fees.
- “Crystallize” capital gains at age 63. Sell all your non-registered investments and then buy them back in order to trigger the capital gains. This minimizes capital gains during the 8 years.
GIS For Life Strategy
If you have no RRSPs or pension, this GIS Strategy may work for the rest of your life, not just for 8 years.
To get the maximum GIS for life, you need tax deductions to offset your CPP and investment income. Tax-deductible fees from a portfolio manager (such as the “Index Plus Portfolio Manager”) or the interest deductions from money borrowed to invest (such as from the Smith Manoeuvre) could effectively offset your taxable income.
Risk of the Strategy
The one big risk: Taxable income. Get too much and you lose the benefits.
The trickiest place to avoid taxable income is on your investments. You need to invest tax-efficiently and plan for low taxable income.
This is important because, with this strategy, you join the ranks of the highest taxed Canadians – low-income seniors. Every dollar is taxed at 50%. Seniors with a taxable income between $17,000 and $27,000 pay 70% tax on every dollar!
Details you need to know
The 10 steps require further explanation:
- Plan ahead: A Retirement Plan that includes the “8-Year GIS Strategy” is the best advice. Decide and plan for the lifestyle you want.
It is easier to live the lifestyle you want, because you only need to provide the after-tax amount from age 64-71. You should not pay any income tax.
Your Retirement Plan should calculate how much you will need in non-registered investments and TFSA to provide your cash flow for 8 years. There are several options to plan for this:
- Maximize your TFSAs and invest in non-registered investments. A strategy like the Smith Manoeuvre is one way to build a portfolio of non-registered investments.
- Cash in your RRSPs over a period of years before age 64. Avoid withdrawing too much each year that would push your income into higher tax brackets.
- Sell your home and downsize. You probably need to downsize significantly or move to a less expensive area to clear enough money to provide for 8 years.
- Borrow from a secured credit line against your home to provide your retirement cash flow for 8 years. You will need to make payments or pay it off later, either by taking a higher income starting at age 72 or you can pay it off whenever you sell your home. This might make sense for you if you will be a “house-rich low-income senior”.
- Retire at age 63 or sooner. Retire by December of the year you turn 63 at the latest.
- Withdraw from your non-registered investments or TFSA. To minimize taxable income from your non-registered investments, sell a bit each month. I call this “self-made dividends”.
You can automate this with mutual funds using a “systematic withdrawal plan” or with a “T-SWP”. A “T-SWP” has a fixed percent, usually 6% or 8% of your investments, that is sent to you each year and is considered “return of capital”. “Return of capital” is tax-free investment income because you defer the capital gain. For other types of investments, just sell a bit each month.
- Apply for OAS and GIS when you turn 64 to start at age 65. You have to apply for GIS to start. After that it is calculated from the taxable income on your prior year’s tax return. When you apply at age 64, fill in the Statement of Income to show the taxable income you expect that year. Hopefully, it is zero!
You might have significant taxable income at age 63, especially if you work until age 63. You want your GIS to be based on your low taxable income at age 64, not your high income at age 63.
- Defer converting your RRSPs to RRIFs until the end of the year you turn 71. Any withdrawals will be taxed at 50-70%. Leave your RRSPs to grow for 8 more years.
- Transfer your pension to a LIRA or locked-in RRSP. Many pensions allow you to defer taking pension income until age 72, but it is not a good idea. If you retire at age 63, you miss out on 8 years of pension income without getting a higher pension later. Your pension income does not rise if you are not working. You can invest your pension and have it grow for 8 years if you “commute” your pension by transferring the value to a LIRA or locked-in RRSP.
You should commute by age 63 to avoid any taxable portion clawing back your GIS. In many cases, a significant portion of your pension may not be transferable to a LIRA and could be taxable in the year you commute.
You should get professional advice here. Commuting your pension has major pros and cons.
- Defer CPP to age 70. Deferring your CPP makes sense for some people and not others. However, if you avoid having 50% of your CPP clawed back, then it is usually best to defer it. Age 70 is the longest you can defer it.
- Avoid salary and business income. If you still really want to work and you can make a significant income, then this strategy may not be best for you. It is only $12,600 tax-free per year. Most people can earn far more in a year of work.
Many people live a “Victory Lap Retirement” by working part-time doing only the part of their job that they enjoy or find meaningful. If you are self-employed, you can still to this strategy by setting up a corporation and leaving all your profits in the corporation.
Get professional help if you are considering this.
- Invest tax-efficiently in your non-registered investments. Canadian dividends are a disaster! Taxable income for Canadian eligible dividends is “grossed-up” to 138% of the cash amount of the dividend. The GIS clawback on Canadian dividends is 50% of 138%, or 69% of the dividend. There is no income tax on Canadian dividends, but a 69% GIS clawback on them is a disaster.
In other words, $10,000 in dividends is $13,800 taxable income. 50% is a clawback of $6,900. You only keep $3,100 from $10,000 in dividends.
Corporate class mutual funds and some other tax-efficient funds pay out smaller taxable distributions (T5 slips) than ETFs or individual stocks. The clawback makes tax-efficiency far more important.
You may be able to offset taxable income if you have been doing the Smith Manoeuvre. If you borrowed to invest and the interest is still tax-deductible, this reduces your taxable income and the clawback.
Investing with a portfolio manager with tax-deductible fees can be an excellent choice, even if your investment return is the same. For example, if you invest in a low-fee global or US fund or ETF that averages 8% per year including a 2% dividend, you lose 50% of the dividend to the clawback. If you invest with a portfolio manager that makes 8% after fees, the fees offset the dividend for tax purposes, so the clawback does not affect you. The portfolio manager only needs to make 7% to give you the same net cash flow as an ETF making 8%.
Tax-deductible fees and fees based on performance are part of the reason I work with an “Index Plus” portfolio manager.
- “Crystallize” capital gains at age 63. This is a good idea for any investments that have gained. If you sell all your non-registered investments and then buy them back, your book value is increased to the current market value. Any capital gains you declare at age 63 at a normal tax bracket will reduce your capital gains during the 8 years when you are subject to the 50% clawback.
Summary
The “8-Year GIS Strategy” is one of the best strategies to turn a modest retirement into a comfortable one for you.
It has 5 huge advantages:
- $101,00 tax-free cash from the government.
- No income tax for 8 years.
- Allow your CPP to grow by 42% by deferring it to age 70.
- Allow your RRSPs and pensions to grow 8 more years. Invested effectively, they could be 50-100% higher, so the rest of your retirement should be much more comfortable.
- Typically, 25% to 50% higher income through your retirement.
25-50% more income can be the difference between a tight, stay-at-home retirement and a freedom retirement with lots of travel and fun!
Live comfortably and tax-free!
You need to plan to have non-taxed cash flow and to avoid the big risk of inadvertent taxable income – especially inadvertent investment income.
You may be able to do the “GIS for Life Strategy” if you have no RRSPs or pensions, and you have other tax deductions.
A Financial Plan is the best way to figure out whether it makes sense for you and how best to do it.
Stay tuned for my next article with real-life stories of people that did the “8-Year GIS Strategy”.
Ed
Planning With Ed
Ed Rempel has helped thousands of Canadians become financially secure. He is a fee-for-service financial planner, tax accountant, expert in many tax & investment strategies, and a popular and passionate blogger.
Ed has a unique understanding of how to be successful financially based on extensive real-life experience, having written nearly 1,000 comprehensive personal financial plans.
The “Planning with Ed” experience is about your life, not just money. Your Financial Plan is the GPS for your life.
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Hi Ed!
Hope you can answer this question?
Our current situation is
My wife 68 collects OAS and GIS , under OAS/GIS table 3
Myself 63 collects a company pension
Future possibilities
When my wife turns 70
Myself turns 65, I would be entitled to start my OAS
We would then be under OAS/GIS table 2
BUT,
If myself delay taking OAS until im 66
Would we still be under OAS/ GIS table 3?
This way, can take advantage on another year of GIS under table 3
Thanks in advance!
Why is it that one needs to retire at 63 and not 64? I believe there is a provision that enables using income from current year (ie 65) if there is a significant reduction expected in employment income. What am I missing?
Hi Greg,
To get the maximum GIS, your taxable income needs to be zero, excluding OAS and $5,000 of earned income. Reducing your taxable income to your T4 may already lose most or all GIS for this year. If you have RRSP room, you probably need to contribute much more to RRSP to get maximum GIS.
My advice in general for you is to invest now based on your long-term strategy and ignore your opinion of the short-term. There are a few reasons for this:
1. Then you do the right thing for tax planning. You don’t have to worry about offsetting taxable income that you can easily avoid.
2. Studies show that investors that do not have an opinion on the short-term stock market have higher returns than those with an opinion.
3. If you are human, your prediction of the short-term stock market is probably wrong. Humans in general have only a 20% accuracy rate in short-term predictions. I saw a study of 10s of thousands of accounts in a discount brokerage. Whenever someone sold an investment to buy another, they tracked those 2 investments over the next year. 80% of the time, the investment sold outperformed the one the investor bought.
4. Your negative sentiment is likely from things you have read. Whatever you read about short-term market predictions is probably wrong. It’s already built in. The current price of the stocks reflects the general sentiment of investors. When investors are predicting a decline, then the current price includes the negative sentiment. All that is needed for the market to go up is that investors become slightly less negative.
5. The market goes up 75% of years and rarely loses money 2 years in a row. Last year was down.
6. The market usually rises during recessions. It often goes down before a recession anticipating it, and then goes up during the recession anticipating better times to come.
7. Our fund managers, especially the growth fund managers, say 2022 was the worst year in more than 30 years for growth stocks. They think a big recovery year is due soon.
8. I’m not necessarily recommeding the “high flyers” you mentioned. Buy the portfolio you think is best for you over the long-term.
Your best strategy is probably to contribute enough to your RRSP to get the maximum GIS this year (and possibly maximize it) and then invest based on your long-term portfolio – ignoring your short-term prediction. Use self-made dividends for the cash flow you need.
A little tough love! I hope this is helpful for you, Greg.
Ed
I am 67 and just retired at the end of February. I can’t do the 8 year GIS strategy now, but I can still do it for 4 years. I have filed the form to start collecting OAS and GIS immediately. I have my TFSA maxed and about $20 k in RRSPs. I am concerned about a recession in the coming year. I am considering two options for my money that is not in registered accounts:
1. Buying guaranteed investments(GICs, High Interest Savings, etc.) then offsetting the income by buying RRSPs. I have two months income in 2023 so if I bring my income down to that T4, will that satisfy my GIS requirements? I know this is short term thinking, and timing the market, but I hesitate to invest when I am convinced the market will see a correction this year.
2. Self made dividends – my understanding from your advice is that I should be 100% growth or value stocks that do not pay dividends so that I only will have taxable income when I cash stocks with net capital gains. Given my fears of recession do you recommend any course of action to invest in relatively safe stocks until I feel comfortable investing in the high flyers, or do you think I should just go all in now?
Thanks
Greg
Hi Stephen,
Yes. The form is called ISP-3041. You need to call in to Service Canada to get it. You fill it in after applying for OAS to tell Service Canada the income you expect for next year. It means you can get up to your maximum GIS right at age 65.
The intent is for people that work until they turn 65. If you work right to 65 and don’t fill it out, then you won’t get GIS the first year, even if you have no other income, since it is based on the prior year when you were working.
Fill out ISP-3041 to tell them you are expecting only OAS and any other income. They will then base the GIS based on what you enter on that form.
If your actual income is higher at the end of the year on your tax return, they will likely want the difference back, so enter the figures as accurately as you can.
Ed
Hi Mark & Keith,
Good points. Thanks Mark.
Deferring CPP is usually worthwhile with the GIS Strategy. It is one of quite a few possible strategies to keep your taxable income at zero (other than OAS) while keeping your cash income high enough for your retirement.
Deferring CPP is usually not beneficial for equity investors, since the growth of your investments should give you more future income than the deferred CPP. However, if this also means you get GIS and pay zero tax, it’s almost always beneficial for you.
Deferring CPP means you get more GIS (not less) and a higher deferred CPP.
In practice, we see in a Financial Plan that you end up paying zero tax for 8 years (or for life). That means you don’t need to withdraw investments to pay tax. Then CPP and your RRIFs kick in at a signficantly higher level. It works out to a surprisingly big benefit.
Ed
Hi Keith,
To make the “8-Year GIS Strategy” work, you need a plan for how to keep your taxable income low. It may work for you with your low income, but it never works well without planning.
Most retirees will get CPP and RRIF (RRSP) and usually other income that is taxable and reduces GIS by 50% of the CPP/RRIF income. How can you plan to have your taxable income be zero despite this income?
Remember that taxable income and cash income for retirees can be very different.
There are options, such as:
1. Defer CPP to age 70 and RRIF to 71. This can get you GIS until then.
2. Get an offsetting tax deduction. For example, take a large RRSP loan before you retire and carry forward the deduction. You can apply the deduction against any taxable income every year until it runs out.
3. Quite a few of our clients are doing the Smith Manoeuvre or other leverage strategy. The tax-deductible interest and portfolio manager fees can offset CPP and possibly RRIF income.
4. For people with investments, withdraw only from TFSA and possibly non-registered investments so that your taxable income is zero, even though you have a comfortable amount of cash income.
4. For people with investments, instead of withdrawing every year, take a large amount every 3-5 years and then zero for the years in-between.
There are a variety of methods to make the GIS Strategy work, either for 8 years or for like. It takes creativitiy to think it through and make a plan. It is usually one main Plan for your life that is needed, and then moderate it slighty year-to-year based on what’s happening.
If you work, you can earn $5,000 without affecting your GIS. If you earn more, you will lose 50% of it to GIS, but you are still better off, since you still get the other half plus your work income. You could also only work enough to make $5,000 or you could setup a corporation and have your corporation collect all the work income above $5,000.
Again, lots of opportunities for the creative mind! Our team finds this creative thinking fun.
Ed
I was looking at information on maximizing GIS to increase my income, and was happy to stumble across this article. It matched several of my thoughts and had some great new information.
However, can you not start at age 65 and simply contact Service Canada to inform them that there will be a drop in your income that entitles you to GIS? I understand you have to call and ask for the form, but that would save you a year of no taxable income without GIS, wouldn’t it?
Keith,
If you have no income or RRSP’s and are broke, you would simply receive the GIS based on your CPP income in the appropriate table depending on if you were single, a couple both 65+, or a couple 65 and one 60-64 etc. If you are able to live without CPP you could defer it, but you won’t really be ahead unless you live past 82 because you’ll get less GIS with a higher deferred CPP benefit.
See tables here: https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html
You can now receive $5,000 of employment income without GIS clawback and only 50% of the next $10,000 is used to clawback GIS. ie: If you earn 15,000, only 5,000 of that income is used to clawback your GIS. This is a huge improvement over the former 3,500 limit.
Also, if you have to work right up to age 65, you can request that your GIS is based on the income for the year you retire, (hopefully lower than the previous) by requesting a special form ISP3041.
Hey Ed,
thank you for posting this – this info is great.
My question is related to GIS, but in a different way. This article is great for those who are sufficiently successful when they’re 60+ years old, but what about for those who aren’t as fortunate? For example, if someone has kids and goes through a bankruptcy and after bankruptcy they’re basically paycheque to paycheque (due to paying living expenses for themselves and their dependents), how do we calculate how much GIS someone in this situation will get?
To put it another way, how do we calculate how much we’ll get from GIS if we retire broke (no home equity, no TFSA, no RRSP, etc.). How do I do the GIS calculation reliably? With CPP and OAS the calculation seems simple, but with GIS there’s all these rules, some which apply, some of which don’t (e.g. first $5000 and 50% tax on income after, there is a rule around this) and to top it off, there’s far less seniors on GIS than there are seniors on CPP/OAS, so there’s less data due to that as well.
Most important part of my question is how do I DO THIS CALCULATION, Ed if you were to calculate one scenario that’s great but life is fluid and things change (maybe one spouse dies, maybe both spouses are alive but one works part time, etc), so could you please educate us on how to do this calculation reliably?
Hi Eamon,
To get the maximum GIS, you could contribute enough to your RRSP to reduce your taxable income to zero (other than OAS income). Taxable income can be very different from cash income. You can only contribute until you are 71, so you could contribute for maximum for more future years and carry forward the RRSP deduction.
There are various options that have to fit into your overall retirement income strategy.
Ed
Hi Ed , I am receiving CPP and OAS but would like to be able to G.I.S. My income with both would be around $20,000. I have some cash set aside Would i be better to buy or put $3,000 in a RRSP to lower my taxable income or put more money in like ($20,000) in RRSP? I would like to get as much GIS as possible.? Thanks.
Hi John,
Yes. Your 2023-24 GIS is based on your 2022 taxable income. Your extra income in 2023 will mean your GIS will stop in July 2024.
Ed
Hi Tom,
These situations always require some brainstorming on various options to see which is best.
You need to provide your desired cash flow from non-taxed or low-taxed sources, or offset income with deductions. You should be able to live off your TFSAs, non-registered investments and credit line for 3 or 4 years, which should give you 3-4 years of GIS. Don’t withdraw from your RRSPs and set your LIF at minimum. Your CPP and minimum LIF will reduce your GIS. Contributing to RRSP gives you a deduction that you can use to offset any taxable income you get. However, it would take some brainstorming to figure out whether it is better to use your non-registered investments for cash flow or for RRSP contributions.
Your credit line can help a lot. If it’s on your home and large, you could get the full 8 years of GIS. Then withdraw in the 20% marginal tax bracket ($50K income each) to pay off your credit line over a few years after the GIS years.
Is your annual income requirement of $70K before or after tax? You should have zero income tax during GIS years, so that could reduce your cash flow requirement.
Ed
Hi Mark,
Thanks for the kind words!
Ed
John,
Yes you will. GIS payment runs from July – June based on the previous years income so for july 2023 – june 2024 will be based on 2022’s income
i am currently receiving GIS, and should be still eligible for the full amount after i file in spring 2023. lets say then i get a job and make 50000 during 2023, which id be reporting on my 2023 taxes. Do i still get my GIS payments until June of 2024, even though i had total income of over 65000 during 2023.?
Just heard about this benefit and wish we had done some things very differently in the past, but here we are.
Our situation:
I’m 63, 65 in Feb 2024 and my wife is 62.
We have:
$190k TFSA
$170k in our LIFs
$615k in RRSPs
$30k unregistered investments
$38k in RRSP room
Annual Income required: $70k
I receive a CPP of 9k, spouse will wait until 70
Annual LIF is $16k but could reduce it to the minimum of $9k
The rest of our income is from RRSPs
Therefore: LIF 16k + CPP 9k + RRSP 45k = $70k
We have a line of credit if we need it.
Seems to me we should be able to get the GIS and and Allowance but I’m not sure how to proceed.
What should we do?
Ed, thanks for that clarification. I appreciate your site and the info it provides. I’ve learned a lot.
Thanks again.
Mark
Hi Mark,
There is no such thing as a stupid question, Mark.
To get the maximum GIS, you need zero taxable income (other than OAS). You can make about $20,000/year as a senior without income tax, but zero taxable income is lower.
You can get there with only TFSA income. You can also get there with cash flow mainly be selling non-registered investments every month. There should be minimal taxable capital gains (especially if you crystallized/claimed all capital gains the year before you turned 65). You could also just borrow from a credit line to spend. If you have deductions to offset any income, such as capital loss carryforwards, undeducted RRSP contributions, or Smith Manouevre interest deductions, you can have a good cash income with little or no taxable income.
In retirement income planning, cash income and taxable income can be vastly different. You need to think through how much both are with each scenario.
From experience, you need to decide ahead of time whether you want to get GIS, since you may do many things very different (or the opposite) to plan for maximum GIS vs. what you would do otherwise.
Does that answer your question, Mark?
Ed
I’m sure this is probably a stupid question but I’m as sharp as a marble and have to ask it anyway. 🙂
When you talk about not having taxable income for this strategy to work, do you mean:
1. NO INCOME at all other than what you draw from your TFSA or…
2. After all your deductions are calculated you owe no taxes because your investment income level was so, ahem, small?
For example, when I use Wealthsimple’s tax calculator tool, if I earn $30,000 in eligible dividends in Nova Scotia, it says I would owe no tax. Does that mean that there would be no GIS clawback?
Hi Brian,
Yes, it might. You may be able to collect a decent amount of GIS starting when you are 67 and your wife is 60. However, it will likely be less than a full GIS. if your RRSPs are too large for you to get GIS after age 72, then the 7-year age difference betwee you and your wife may limit the benefit of the 8-Year GIS Strategy for you.
If you can do a GIS for Life Strategy, then your age difference may only mean a bit less the first 5 years.
The Allowance is different from OAS, so this stratgy may work differently until your wife turns 65.
We approximate the results by thinking of the Allowance as a 1/2 GIS. You can start collecting GIS when you are 67, but your wife’s half of that GIS is likely to be about 1/2 for the first 5 years. You have to go through the Tables to get the exact numbers, but the 1/2 estimate gives you a good idea.
The GIS Strategy allows a lot of options if you are creative. You need to find non-taxable cash flow and ideally some tax deductions. You can tell from the article how many creative options there are to give you more GIS or allow the GIS Strategy to work for you for many more years.
Ed
Brian,
You can start maximizing GIS at 65, your wife’s GIS will have to wait for 2 years but you will still have to start minimum withdrawals (% based on her age) from your RRIF at age 72
I’m 7 years older than my wife. Does that mean that this would just work for us from the time when I turn 67 when she could start collecting the Allowance?
I went back and watched again and agree those early RRSP withdrawals coupled with high taxes and the lack of funding via non-reg accounts skewed the argument in the author’s favour. Also agree spending can increase as you get into the “slo-go” stage. We plan on flying business class to Asia by then ! Thanks for pointing this out
Hi Mark
With the 8-Year GIS Strategy done right, you should expect a significanlt higher income over your retirement, which might lead to more tax overall (although probably paid much later).
I watched the video. Their conclusion is mostly because of some weird assumptions and not knowing how to implement the strategy very effectively.
For example:
– They included withdrawing a large amount of RRSP before 65 to maximize TFSA, so they could withdraw from TFSA during the strategy. This creates a largre initial amount of tax and is usually completely unnecessary. Most people have a noticeable amount of TFSA and/or non-registered investments when they retire (especially our clients). The clients in their video had a significant non-registered portfolio which they cashed in instead of using effectively during the GIS years. If not, there are a variety of ways to fund your retirement income for a few years, such as deferring RRSP deductions made earlier, borrowing from your home temporarily to spend during that time, having offsetting deductions such as Smith Manoeuvre interest, etc. Creative tax planning gives you all kinds of options.
– They included having to cash in all non-registered investments before age 65. Again, these could have been provided retirement cash flow during the GIS years, so they didn’t have to cash in their RRSPs. You need to minimize any taxable income from investments, but you can do this by triggering capital gains before age 65 and then investing effectively. Focus on capital gains, which will be little or nothing after you triggered the capital gains.
– The assumed 7 years of GIS, but you get 8. It’s paid the following year, so you also get it at age 72.
– They assumed a modest investment return of 5%. Most of our clients have a higher rate of return, which means the investments that you can leave to grow should grow to a lot more. During the 8 years of GIS, you withdraw a lot less from your investments both because you are getting the government income and because you pay zero income tax.
– They assumed seniors will spend less as they age in 3 stages, which we find real seniors with money and health don’t usually do. Most 80-year-olds with health and money travel as much as they did when they were 65. In fact, they may take more luxury travel. The most expensive luxury cruises are full of people in their 80s. People hate to cutback their lifestyle! This weird assumption means you would have to withdraw a lot more from your investments early in your retirement. In reality with most seniors, they have a constant income rising by inflation. With normal seniors, you leave your investments grow much more to fund a higher income later, which means the investments you don’t withdraw during the GIS years grow for many more years.
Anyone can come to any conclusion if they make enough weird assumptions. The guys in the video could allow their clients a signficantly higher retirement and not ever be forced to cut back if they implemented the 8-Year GIS Strategy effectively.
Ed
An advisor did an analysis of maximizing GIS this way vs a “conventional drawdown” and determined one would end up paying much more tax in the long run:
https://youtu.be/PasW-XsbMfk?t=816
Thank you, Ed.
Does my seven-month employment income before retirement date in 2021 count for July 2022-June 2023 GIS amount? The capital gain was also realized few months before I retired last year.
Thanks.
Hi Tanya,
If you are collecting GIS, then every dollar of taxable income reduces your GIS by $.50 for the next year. It is probably worthwhile to offset any taxable income, other than the OAS. In your case, that should mean offsetting your CPP and 50% of the capital gain on the T5008.
A T5008 slip will show a capital gain. It is the “proceeds of disposition” (Box 21) less the “book value” (Box 20). Your capital gain will be box 21 – box 20. Your taxable incomme is 50% of the capital gain. Add this to your CPP income for the year. The total is probably the RRSP contribution worthwhile for you.
I hope that’s helpful, Tanya.
Ed
Hi Ed,
I’ve just received a T5008 form for reinvested capital gains (I didn’t sell anything or received any money, it was a result of my mutual funds merger in 2021, non-registered account). So it looks like now I have to hurry up before RRSP contribution deadline to prevent GIS reduction…. I am single, retired in August last year and receive CPP+OAS+GIS.
My question is, how much do I need to contribute to offset the income? Should it be equal to CPP summed up from August to December 2021 plus the amount of capital gains, reinvested in April 2021?
Thanks for your time,
Tanya
Hi Ruby,
The maximum GIS benefit for 2021 for a single person is $11,229. That is the same regardless of whether you receive the basic OAS at age 65 or the higher OAS at 70.
By delaying OAS to age 70 gives you more OAS, but means you get no GIS from age 65-69 and the same GIS after age 70. GIS is part of the OAS program, so no OAS means no GIS.
If you qualify for GIS, it is probably best to take OAS at 65, so you can also start getting GIS.
Whether or not to defer OAS to age 70 depends on many factors, but the main one is how you invest (https://edrempel.com/?s=oas+70 ).
Ed
Hi Mark,
Good point. With interest rates so low today, to offset 100% of your RRIF withdrawal, you would have to borrow a large amount to invest.
This needs to be customized for every client. Borrowing to invest does not make sense at all for many seniors. Some can borrow the amount they are comfortable with, even though it may only partly offset the RRIF withdrawal.
We do have a reasonable number of seniors that have borrowed the full 80% of their home value to invest. It works exceptionally well for seniors, assuming they will stay invested for the long-term. It may be the only tax deduction they get and they can take “self-made dividends” (https://edrempel.com/?s=self-made ) from the leveraged investments for a very low-tax cash flow.
It’s rare to start borrowing after they retire though. Most of our clients that have borrowed to invest did it years before they retired and just maintained it.
Ed
Thank you Ed
Thank you Ed
Defer OAS till 70 . Today 2021 is 7380, add 36% with no inflation is@ 70 10036. What is max value of GIS @ 70 with no income..The max value of GIS is needed inorder to subtract half your income ? Let us assume that there is 2% inflation. In 2021 GIS = 11 076 therefore @ 70 GIS is 12228. ? Substrat half of income of 10000 leaves GIS of 12228-5000 = 7228. Then add 10036 gives a total of 17 264 . Basically how do you know what GIS will be in the future ? When you defer 5 years OAS what number does one use for GIS ? I looked at passed years and noticed that GIS was in recent years worth 150% of OAS. Example 2021, 923.00 is 150% of 615.00. As such, I would substract half of my monthly income from 923. Fast forward 5 years , I thought that if OAS was 10036 ,150% would give me 15055 ? Someone would subtract half their income from Max GIS.
Wouldn’t the RRSP meltdown strategy pose a high risk for someone with a substantial RRSP. Lets say a 600,000 RRIF with required min withdrawals of 4% or 24,000. To offset this one would need to borrow and invest 800,000 to generate enough interest to offset the 24,000 at a 3% loan rate. For many seniors this would expose most of their home’s value to market risk.
Hi Ruby,
If you quliafy for GIS, it is most effective to start both OAS and GIS at age 65. You can only get GIS if you are getting OAS and OAS does not reduce your GIS.
The amount of GIS is based on your taxable income (excluding OAS). It’s not a percentage of OAS. If you wait for a higher OAS, you don’t get a higher GIS – and you miss getting GIS all the years from age 65.
Yes, you are correct that your GIS is reduced by 50% of your CPP. It might be worthwhile to delay CPP to age 70, so you get more GIS from age 65-69.
Ed
Hi Elisabeth,
Mark is on the right track by suggesting you withdraw your RRSP in one lump. Then a portion of it is only taxed at 20% without affecting your GIS. If you take it bit-by-bit, all of it will always reduce your GIS by 50%.
In your case, I would suggest to delay it by just holding your RRSP until age 71, converting it at the end of the year to a RRIF, and then withdraw 100% of it at age 72. This allows it to grow tax-deferred a few more years.
A big issue for you is your GICs that are not in your TFSA. You are getting interest below inflation and then losing 50% GIS on the interest.
I would sugget to get educated on higher-growth investments. They can get you far higher return with less taxable income, so you can keep more GIS. Higher growth investments will go up and down short-term, but if you have a top portfolio manager, they have provided good long-term returns very reliably. For example, the worst 25-year calendar return of the S&P500 (US stock market) has been 7.9%/year. It has always been a big gain over 25-year periods – and you probably have at least that long.
The process of taking cash flow from investments with little or no tax is called “self-made dividends”. Essentially, you have investments that just grow over time without paying any taxable income and you just sell a bit eac month. Here is an article about it: https://edrempel.com/self-made-dividends-dividend-investing-perfected/
You should take cash flow only from your non-registered investments and keep putting $6,000/year into your TFSA to defer as much tax as possible.
A strategy that would work very well for you but is probably too aggressive for you is the “RRSP Meltdown”. Since you own your home, you could setup a secured credit line and borrow a bit to invest and then convert your RRSP to a RRIF to pay the interest. Borrow just enough so that the RRIF withdrawal pays the interest. You can then take some “self-made dividends” from the new borrowed investments to give you more cash flow with a minimum of tax.
It sounds like you have only been buying GICs, so borrowing to invest in higher growth investments is probaby too aggressive for you. It’s a creative idea that could work exceptioally well for you, but you would need to get educated and experienced on the investments first.
I hope that’s helpful for you, Elisabeth.
Ed
How about delaying OAS & GIS to 70 years old . In 2021 , OAS is 7380 and i calculated GIS to be 150% of OAS
11 070 when 0 revenu . In 5 years no inflation, OAS is 10 036 and GIS is 15 055. If I take CPP @ 60 $ 10 000 , Am I correct that the GIS would be reduced by $ 5000, and would be 15 055 – 5000 = 10 055. add to this OAS of 10 036 .
Elisabeth,
I forgot to exclude your GIS as non taxable in the estimated tax on your 30,000 RRSP withdrawal above so your total tax would be approximately 3,600 instead of 5,600. Don’t forget to convert 2,000 of the RRSP to a RRIF before withdrawing to take advantage of the 2,000 pension amount credit.
Elisabeth,
– I’m assuming your income is about 3,880 for OAS/GIS of 1342 of which 723 is GIS
Best option is to take it all at once and you will lose about 1/2 of it:
– 1 year of GIS (723 x 12) = 8,676
– approx 20% tax on 28,000 = 5,600 (Convert 2,000 into a RRIF to get the 2,000 pension amount credit)
– Total of 14,276
Take out, say 2,000 per year and you will lose about 75% of it, due to GIS reduction in the “top-up” zone
ie: a 2,000 withdrawal will reduce your GIS by 125/month or 1500/year which is 75% of the 2,000
Once your income is in approximately the 10k range the reduction reverts back to 50%
You can work out the numbers yourself using these tables:
https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html
Here is my situation. I am 67, receiving OAS & GIS total of $1342 and only CPP $242 /month with $140,000 mostly in GIC investments and TFSA acct, but 30,000 in a RRSP due at the end of this year. What is my best strategy going forward. Should I take all the RRSP at once and eat a year of GIS, take out some each year and if so how much to keep the GIS, or wait until 71, convert and then take out how much each year? I own my own home.
Hi Mary,
Yes, you should be able to do the 7-Year GIS Strategy (in your case). 🙂 It will take careful planning and execution.
The question is: How much do you need per year for the retirement lifestyle you want? You will need to provide this amount for the 7 years from a non-taxable source, such as your TFSA, or credit line, or possibly non-registered investments if you are very careful to avoid taxable income.
You should be able to provide about $80-90,000/year after tax (since there should be no tax) from your credit line, TFSAs and OAS & GIS. Is that enough for you?
If not, there are planning options you can do now that should set you up for a higher income.
You have thought of deferring your CPP, converting RRSP to RRIF, and withdrawing from your LIRA, which are the most obvious taxable income that could mess you up.
Your biggest threat could be your non-registered investments. It’s challenging to invest with no taxable income – no capital gains and especially no dividends. You wil lose GIS for 25% of capital gains, 50% of foreign dividends and 70% of Canadian dividends.
There are some options to deal with this, including:
1. Invest for deferred capital gains and crystallize gains (sell & buy back) your investments the year before you start GIS.
2. Carry forward a bunch of RRSP deductions.
3. Use your credit line to borrow to invest in tax-efficient investments, so that the interest deduction offsets investment income on all your non-registered investments.
There are a bunch of technicalities to maximize this strategy in your case:
1. Defer unlocking 50% of your LIRA until you are 71. When you unlock, you have to put 50% into a LIF which has a minimum withdrawal. The other 50% can be in an RRSP with no withdrawals, but the minimum withdrawal is 4-5% of your LIF. You can transfer the pension to your own LIRA, but don’t unlock 50% until you are 71.
2. Start OAS and GIS, and probably retire, in January. A part year will probably not get you any GIS.
3. Apply for OAS a year ahead. It takes them 6-9 months to approve you.
4. With or after applying for OAS & GIS, submit form ISP-3026 to estimate your income for the next year. This allows you to start GIS right away, instead of waiting a year.
I hope this is helpful for you, Mary.
Ed
Ed,
My husband and I are close to retirement (60 and 59 now) and we are planning to work until 65.
We both will have (predicted by Service Canada) CPP of slightly over $ 1000 each at the age of 65 and 37 years toward OAS (almost full amount).
I have my work group pension plan of approximately $ 250 000 at the age of 65 (defined contribution).
Our combined RRSP will be approximately $ 600 000, TFSA and non-registered savings approximately $ 450 000.
No loans or mortgage payments; $ 300 000 secured line of credit available if needed.
We really would like to work until 65 and then apply the plan that you described; in this case it will be more a 5-year plan.
Can we work until the end of a year that we turn 65 and then apply for OAS and GIS; not touching any of CPP, RRSP or pension? However, I would like to transfer my pension into LIRA and if possible unlock and transfer 50% to RRSP (without any withdrawals).
What it will mean is that we would be getting OAS (starting in January of the year that we turn 66) and GIS a year later, based on very little taxable income from previous year (only from OAS).
Can we do it?
Thanks.
Hi Jay,
You really need a Financial Plan! Figuring this out right can easily pay for the entire cost just with this one tax issue. That is in addition to the main benefits, which are working out the lifestyle you can support for life, how to optimize everything and pay the last lifetime tax.
Here is the framework for you. You would not be paying 15% on withdrawing from your RRSP. It’s a mix of 0% and 20%.
To the extent you and your wife have personal tax credits, you can withdraw from your RRSP with zero tax. You should obviously do this.
When your taxable income is above your personal tax credits and below $49,000 each, you are paying 20% tax. That is your marginal tax bracket (MTR). Whether or not this is a good idea depends on what tax rate you would withdraw at in the future.
For example, you can have taxable income of $49,000 each, or $98,000/year all at the lowest tax bracket. You may well be able to always stay in the 20% tax bracket. If so, then withdrawing now and paying 20% tax is a bad idea if you can withdraw in a future year and pay the same 20%.
However, if your growing RRSPs will eventually push you into the 30% tax bracket, then withdrawing now at 20% may be smarter than paying 30% in a few years.
This is especially true if you can do the GIS Strategy, since then you would be in a 50% or 70% marginal tax bracket, when you include the GIS 50% clawback and 20% income tax. In your case, CPP will wipe out most of your GIS. You will need a creative option to offset your CPP income, such as Smith Manoeuvre interest or deferred RRSP deductions.
The important questions for you here are:
1. Can you plan to live the lifestyle you want and always stay in the 20% tax bracket (income below $98,000/year)?
2. Can you plan to get the GIS?
The other tool you need is to figure out the best option when future tax is higher. For example:
1. If you can pay 20% tax today to avoid 30% tax 10 years from now, is that worthwhile?
2. When you and your wife are both gone, your estate is taxed at various tax brackets with your income above $220,000 being taxed at 54%. That could be a good part of your remaining RRSP. At age about 60, ther life expectancy of the one of you that lives the longest is about 35 years. If you can pay 20% tax today to avoid 54% tax in 35 years, is that worthwhile?
The tool to figure this out is an investment return projection. You have to spend money to pay the 20% tax now, which means you have that much left in investments. Assuming you are an equity investor, your future long-term returns may conservatively be 8% or 10%. The question is, would that amount of investment grow to more than the tax you would save?
For example, if you withdraw $10,000 from your RRSP, you pay $2,000 in tax which you would otherwise invest. At 8% growth, that $2,000 would grow to more than $3,000 in 6 years and more than $5,400 in 13 years.
This means that if you pay 20% tax this year to save 30% tax in 10 years, it is not worthwhile because the $2,000 in tax you pay is expected to grow to more than $3,000 in 10 years. It’s only worthwhile paying 20% tax to avoid 30% tax within 5 years or less.
Similarly, you may pay 54% tax on part of the remainder of your RRSPs when you pass on. It is only worth paying 20% tax now to avoid 54% tax on death if you expect both you and your wife will be gone in less than 13 years.
With these tools to compare tax brackets in different years, and looking at your marginal tax brackets and GIS you can plan for – and a lot of creativity, you can figure out what strategies should be in your Financial Plan to minimize your lifetime tax.
Ed
GIS is recalculated in July based on your previous year’s income, so an income over the 24k this year (2021) won’t affect the payment until July 2022. You can always contribute to your RRSP, if you have room, to lower your income below the threshold. Also, if the income is from employment, the 1st 5k is exempt as well as 1/2 of the next 10k
Hi Mark:
We(my wife and I)current received GIS however I know that this year I will have an income that will far exceed the $24,000 that is threshold for couples. Should I notify Canada Revenue now to avoid repaying the GIS later?
Mark,
As I mentioned a couple of times, I have withdrawn from RRSP in the past (in fact at least 2x) without paying any tax at all. To be more precise, there was tax witheld by the financial institution, but that got reconciled at tax filing time. It is precisely this experience of being able to withdraw tax-free that made me realize that – while that was advantageous for me – it even makes more sense if I withdraw to the MAXIMUM REASONABLE, and to me, that is 15%. I realized that the correct objective is to minimize LIFETIME taxes paid.
Withdrawing now, as long as I keep it to 15% tax, is even more important because this will help me implement the 8-year GIS strategy described in Ed’s blog post.
Jay
Jay,
You might want to post your question on the canadianmoneyforum, there’s some very knowledgeable people on their forum
I used numbers in 2023 to show how you could withdraw from your RRIF and pay almost zero tax, but of course this depends on the size of your RRIF. I can understand the logic of transferring to a TFSA and paying 15% now if your RRIF balance large enough to incur greater tax in the future. Another advantage of the TFSA will be that the surviving spouse and their estate will pay less tax
Mark – OK, I see. But for my personal situation, I need to use numbers that are in effect today, as opposed to numbers that will be in effect 3 yrs from now. If I wait until 2023, then OAS will start to kick in for my wife.
I want to take advantage of the fact that I have zero employment right now, in 2020, so now would be a perfect time to withdraw the maximum amount that makes sense. It is a balancing act, of course; if I withdraw an amount that attracts too much tax, then that is not going to be to my advantage.
Like I said earlier, the first year I was not working, I withdrew the maximum amount that kept me from paying any tax. However, I came to realize that the objective should be to pay the least amount of tax over my entire lifetime, as opposed to paying zero tax now. I think that paying 15% tax now, and then putting the proceeds to TFSA is something that is very acceptable, at least to me. The 85% that I withdrew and will remain in TFSA until needed will never be taxed again.
Tried replying a few times but it’s not showing up…..
You are getting higher taxes because ufile 2019 is using $12,069 for your personal credit which will be $15,000 in 2023 and the age amount will increase as well.
Try using Studiotax, it’s free and has a better UI
As I said I used a flat 20% on income over 50k, remember I mentioned the personal amt will increase to 15k in 2023.
I just put the actual figures into studiotax (I increased the personal credits to 25k by adding volunteer fireman (3,000) and interest paid on student loans to 437 and got these results:
Tax of $330 ea for 25k income ((33k + 17k) / 2), so 660/17k= 3.9% and
for 60k income the tax was 1,449 which is 10.7% of the 27k (also included the climate action credit)
Your actual tax when you are 72 will be less than this because personal and age credits will increase.
Here is the studiotax file I used: https://gofile.io/d/9ges2o (Change T4RIF amt for various incomes)
You can download the free studiotax here: https://www.studiotax.com/en/?page=2
As I said I used a flat 20% on income over 50k, remember I mentioned the personal amt will increase to 15k in 2023.
I just put the actual figures into studiotax (I increased the personal credits to 25k by adding volunteer fireman (3,000) and interest paid on student loans to 437 and got these results:
Tax of $330 ea for 25k income ((33k + 17k) / 2), so 660/17k= 3.9% and
for 60k income the tax was 1,449 which is 10.7% of the 27k (also included the climate action credit)
Your actual tax when you are 72 will be less than this because personal and age credits will increase.
I can email the studio tax file to you, just send me an email to my dummy acct johnh114532@gmail.com or or use this link: https://gofile.io/d/9ges2o (Change T4RIF amt for various incomes)
You can download the free studiotax here: https://www.studiotax.com/en/?page=2
[changed my id cuz last 2 comments did not post]
Jay,
As I said I used a flat 20% on income over 50k, remember I mentioned the personal amt will increase to 15k in 2023.
I just put the actual figures into studiotax (I increased the personal credits to 25k by adding volunteer fireman (3,000) and interest paid on student loans to 437 and got these results:
Tax of $330 ea for 25k income ((33k + 17k) / 2), so 660/17k= 3.9% and
for 60k income the tax was 1,449 which is 10.7% of the 27k (also included the climate action credit)
Your actual tax when you are 72 will be less than this because personal and age credits will increase.
I can email the studio tax file to you, just send me an email to my dummy acct johnh114532@gmail.com or or use this link: https://gofile.io/d/9ges2o (Change T4RIF amt for various incomes)
You can download the free studiotax here: https://www.studiotax.com/en/?page=2
As I said I used a flat 20% on income over 50k, remember I mentioned the personal amt will increase to 15k in 2023.
I just put the actual figures into studiotax (I increased the personal credits to 25k by adding volunteer fireman (3,000) and interest paid on student loans to 437 and got these results:
Tax of $330 ea for 25k income ((33k + 17k) / 2), so 660/17k= 3.9% and
for 60k income the tax was 1,449 which is 10.7% of the 27k (also included the climate action credit)
Your actual tax when you are 72 will be less than this because personal and age credits will increase.
I can email the studio tax file to you, just send me an email to my dummy acct johnh114532@gmail.com or or use this link: https://gofile.io/d/9ges2o (Change T4RIF amt for various incomes)
You can download the free studiotax here: https://www.studiotax.com/en/?page=2
Hi Mark,
I am getting slightly different numbers. What are you using to calculate? I am using UFILE 2019, so my numbers are based on 2019 tax rates, deductions, etc.
When I set up UFile 2019 and
1) adjust our year of birth so that husband/wife age as of 2019 filing season is 70/72
2) Combined income is 50k (CPP/OAS is 33k + 17k RRIF)
I get a combined tax of $1,999.88. This is 4.00% of 50k, but it is also 11.76% of 17k RRIF.
If I bump up income to 60k (so that RRIF is now 17k + 10k = 27k), I get a combined tax of $4,163.42 (6.94% of 60k), but this is also 15.42% of the 27k (4,163.42 is 15.42% of 27k). So this is the case I mentioned earlier, where withdrawing bigger amounts now (like the 88k/year combined) attracts a tax of ~15% on the RRSP withdrawal, but the same rate of ~15% will be hit at lower levels (like the 27k) when this is combined with CPP/OAS. Even the smaller 17k attract 11.76% when combined with CPP/OAS.
Re: annuities – yes, I am including that in my plan, but this will likely come later (75+ years old?).
Jay,
a,b) How much tax you will pay really depends an the size of your RRIF, If you can keep your total taxable income < 50k you won't pay any tax. With your 33k CPP/OAS that leaves you with 17k which represents an RRIF of ~315k at 5.4% RMD at age 72. If you want an income of ~60k, you could withdraw another 10k and pay 2k or 7.4% on the total 27k withdrawal.
If you have a 1M RRIF you would have to withdraw 54k and pay 7.4k or 13.7% (20% of 33K + 54k – 50k)
Note: I'm using a fixed 20% tax on the excess of the 50k in personal credits and ignoring reduced age amount and reduced Ontario credits
You could also just withdrawal 13229 each over the next 3 years for a total of 80k and pay zero tax. It will actually be a little more due to increasing personal credits.
If you are going to be in a higher bracket when RMD, maxing out your TFSA and taking the tax hit now may be wiser in the long run. You'll have to work it out based on your RRIF balance.
c) Their is no avoiding that 50% hit, on the excess of 216k, when the last spouse passes other than expensive Life insurance and some questionable avoidance schemes. I like to think of it as a DB pension plan that usually has no estate value anyways. You might also look into annuities with a long guarantee.
Hopefully the GIS will be around in 5 years without means testing but I wouldn't be surprised if they introduced stricter eligibility especially with the covid deficit.
Hi Mark,
Yes, I totally understand that future growth of the 40K tax is lost. In fact, when I stopped working a few years ago, I withdrew the maximum amount without paying tax (the $13,299 in your example) on the first year that I didn’t have any earned income. That was well and good.
But then, I started to realize that there is NO WAY that I can keep on doing this (i.e. pay ZERO tax on RRSP/RRIF withdrawals) until I die. At one point, future sources of income – whether it be when we start receiving OAS, and/or CPP, and/or RRIF RMD – will push us to a tax bracket where we will have to pay taxes.
For example, when I’m 70 (wife: 72), both of us will be receiving OAS (even without GIS) and CPP, and I estimate all of these to be around $33k in today’s dollars. I ran the numbers through a tax software (UFile 2019 version) and adjusted our birthdays so that we are 70 & 72 during the 2019 tax filing season. If that was our only source of income, then the tax will be zero. Withdrawals from RRSP(T4RSP) or RRIF(T4RIF) will not immediately attract taxes at low levels, but by the time we take out approximately $22k (combined) – for a total $55k combined with OAS/CPP – while still low at $2,994, or 5.45% of $55k – is now 13.46% of the RRSP/RRIF withdrawal (2,994/22,000). If I bump our total income (includes OAS/CPP) to $87,800 by making a combined RRSP/RRIF withdrawal of $54,893, the overall tax will be 12.13%, but that will also be 19.41% of the RRSP/RRIF withdrawal.
By contrast, if I withdraw $55k ($27,500 each) before we start receiving OAS/CPP (in other words, no other forms of income), the tax on that will be $6,938 or 12.61%.
So, the way I look at it now is that – at least in my specific scenario – there is NO WAY that I will pay zero tax on my family’s RRSPs, if we go all the way to end of life. So I am looking at roughly 15% as an acceptable rate.
Here’s another thing I am considering:
While we surely need to factor in the potential growth of taxes paid today, we also need to factor in the potential future growth of the capital left in the RRSP and its tax implications, especially if we put the proceeds to TFSA
Let’s take our earlier example of $88k – $44k/year/spouse taxes at $6,743/year/spouse. If this is done for 2 (instead of 3) years, it will look like this:
Total amount withdrawn: $176,000
Total taxes: $26,972
Net: $149,028
So the questions in my mind are:
a) If I don’t withdraw, there is potential TAXABLE growth of the tax ($26,972) BUT there is also a potential TAXABLE growth of the Net ($149,028). If I withdraw and put the proceeds in TFSA, then the potential growth of the $149,028 will never be taxed.
b) If I don’t withdraw and not pay the tax now, how much tax will I pay later once other sources like OAS, CPP, RRIF RMD start kicking in?
c) What % tax will we pay when we die? I know that it can be rolled-over without tax consequences to the surviving spouse, but how much tax will the survivor pay when he/she eventually dies? This, to me, is a big unknown, for it will depend on how much is left in the RRSP/RRIF at that time, but to me, there is a real possibility that the tax hit could be 50+%
Let me know what you think about my thoughts. Please know that I really appreciate your comments.
I get a tax of $6743 each on an RRSP withdrawal of 44k each:
https://simpletax.ca/calculator (use other income)
so, that’s a total of $40,458 in 3 years that will be LOST for future growth. This is significant as Ed explained.
You can, however, withdrawal $13,229 each without paying any tax ($124 in Ontario tax because their personal credit is less) The 13,229 will increase each year to 15k in 2023. If you need more money to live on, consider a HELOC or 1st mortgage at very low rates.
The 50k personal credits we keep referring to is not in effect until 2023, it is currently 46k which is the personal + age + pension credit of which the age and pension are not in effect for you until 65
Note: You will NOT be eligible for GIS when you are 72ish because your combined CPP will exceed the income for GIS plus mandatory RRIF withdrawals will put you way over the top.
Hi Ed,
Thank you for your replies.
I think we are not exactly on the same page.
You said: //I agree with Mark that it probably does not make sense to withdraw $200-300K from your RRSPs. That will push you into the 40%, 50% or 54% tax bracket.
…
For example, assume $100,000 RRSP taxed at 40% at age 64. That’s $40,000 tax.//
I have a feeling that you understood my initial statements to mean $200-300k PER PERSON.
Right now, I am considering withdrawing a max of $44k/year PER SPOUSE, for a combined $88k/year, and then do this for several years before age 65. I intend to feed the numbers to a tax software, but based on a quick calculation from the tax calculator at the Ernst & Young website – https://www.eytaxcalculators.com/en/2020-personal-tax-calculator.html – $44k/yr will attract a tax of $6,293/year PER SPOUSE, for an average tax rate of 14.30% at an MTR of 20.05%. This is for Ontario.
So assume that we are both under 65, with no income except for the RRSP withdrawals. My understanding is that if each spouse withdraws $44k/year (for a total of $88k/year combined), the tax will be approximately $6,293 for each spouse (or $12,586 combined). So the entire $88k is taxed at 14.30%. We don’t need the money at this time, so the net of these proceeds will go to our TFSA until we max out our contribution rooms.
The $200-300k I mentioned is the result of doing this for a few years, for both spouses, making sure that we attract only around 15% or so in total taxes. So this would definitely fit your other statement where you said: //I think you need to keep in the 20% or 30% tax brackets, but not go higher, with lump sum RRSP withdrawals.//
I hope I made myself clearer.
I also realize what you and Mark say about the implications of the potential growth of the taxes paid from the lump sum RRSP withdrawals; and these need to be taken into account. The net proceeds of the withdrawals will all go to TFSAs until our contribution rooms are full, so that part will be sheltered.
As for the tax credits, I feel I do not yet fully understand the implications of these. I will play around with various scenarios using a tax software, perhaps varying our dates of birth so that it forces the tax software into thinking we are already 65 years old.
But let me ask a question, hoping that it will guide me as I experiment with various numbers using a tax software. I have seen references from you and Mark about a “maximum of $50,000 of tax credits”. Does this mean that – as of today – the various tax credits (which is composed of “personal tax credits, age credit and pension credit for both spouses”) will max out at an income of $50k/year? Do these tax credits only start at 65?
Again, thank you very much.
Jay
Hi Mark,
You are referring to a maximum of $50,000 of tax credits – not tax deductions. This is the personal tax credits, age credit and pension credit for both spouses. Tax credits are always based on the lowest 20% tax bracket, not based on their marginal tax bracket.
Usually, with the 8-year GIS Strategy, you keep getting GIS until age 72, since it’s based on prior year income and you don’t have to start withdrawing from your RRIFs until age 72. CPP starting at age 70 might reduce or elimnate GIS a year sooner, but there is often a method to offset just the CPP, such as carrying forward $25,000 of RRSP contributions.
Jay would only lose the tax credits for 6 or 7 years, since he can apply for GIS to start at 65 based on projected income at age 65, and yet continue to receive GIS at age 71 or 72 when also receiving CPP and then RRIF.
Not getting tax credits while getting GIS reduces the benefit of the strategy, but still leaves a large tax-free benefit. The maximum benefit for couple is $116,000 tax-free GIS over 8 years. The maximum loss from today’s personal tax credits is only $64,000 ($46,000 for a couple times 7 years x 20% tax on tax credits).
Ed
Ed,
If a couple was in a 30% tax bracket at withdrawal time, 50k over 8 years would save them 120k in taxes (400 x .30) although I don’t think Jay’s marginal rate would be that high. Also, note that Jay and his spouse’s CPP will eliminate any GIS at age 70
Hi Mark,
The $116,000 tax-free GIS for 8 years is clearly much more than any tax savings from claiming tax credits, but you are right that is an offset.
I also agree that withdrawing $300K from an RRSP at age 64 is not a good idea. I explained this to Jay. If you prepay tax now, you have to calcualte how much that tax money could have grown to over 8+ years if you left it invested – and compare that to the lost GIS in the future. I think you need to keep in the 20% or 30% tax brackets, but not go higher, with lump sum RRSP withdrawals.
Ed
Hi Jay,
I agree with Mark that it probably does not make sense to withdraw $200-300K from your RRSPs. That will push you into the 40%, 50% or 54% tax bracket. If you still have RRSPs or RRIFs after age 71 and would qualify for GIS, the withdrawals are clawed back at 50%. However, if you pay 40% or 50% tax when you are 63 or 64, that tax amount could have grown to more.
For example, assume $100,000 RRSP taxed at 40% at age 64. That’s $40,000 tax. If you left it in your RRSP, it could grow at say 8%/year as an equity portfolio to $74,000 after 8 years. If you left it in your RRSP and withdrew it as a RRIF, you might lose $50,000 in GIS over the years, but that’s less than the $74,000 that your tax at age 64 could have grown to.
The actual calculation is more complex, but to get the idea, I would suggest to keep your taxable income below $90,000. That is the top of the 30% tax bracket. Above that, you are paying 40% tax at age 64 to possibly avoid a 50% clawback 8+ years later. You would be better off letting your RRSPs grow and paying the 50% clawback.
Ed
Hi Jay,
OAS & GIS usually take 6-9 months to process. I would suggest to apply 9-12 months ahead.
Each program is a separte application. They don’t make it easy. OAS, GIS, Allowance are 3 separte forms.
There is also another form to start GIS at age 65 if you retire at 64. Since OAS is based on the prior year’s income, to start at 65, you could have your income be zero for age 64. Alternatively, there is a form to request starting GIS at age 65 by using your projected age 65 income instead of your actual age 64 income. This should apply to many people that have employment income at age 64, but little income at 65. The application for OAS is ISP-3025 and the form to base it on projected income is ISP-3041.
Ed
Liberals have “promised” a personal credit increase to 15k by 2023, it’s 13229 this year, so 15k + ~8k age amt + 2k pension amt = ~ 50k for a couple.
https://www.ctvnews.ca/politics/liberals-move-on-tax-cut-for-the-middle-class-in-the-commons-1.4721700?cache=yes%3FclipId%3D89530%3Fot%3DAjaxLayout
Looks like you’ll need another sheet to model the effect of the tax paid on the ~ 300k RSP withdrawals and the income effect on GIS from the non-registered portion of the withdrawals. You will lose the compunding of that 48k forever so it’s significant. It’s a real balancing act as I’ve found out. Some of that income can be offset with available RRSP room but then you will have a large RRIF portfolio when RMD starts.
I’d be interested to see your speadsheet when it’s done.
Hi Mark,
Thanks for your replies. YES, you are right. I’ve been doing some calculations, and running numbers on my tax software (UFile). I am using 2019 tax year version since the 202 tax year version is not yet available. So I was aware of that approximately $48k tax (between the two us, over 3 years), and I am generally OK with that, especially since most of my RRSP was contributed 15-20 years ago, when I was in a very high tax bracket (I think I was hitting 50% at some point). My wife’s contributions were made at a lower tax bracket than mine, but still much higher than the approximately 16% (48k/300k) tax hit if we withdraw in the next few years.
Then, since we don’t yet need the money, all these withdrawals are transferred directly to our TFSAs (transfer in-kind of ETFs), so they will be sheltered moving forward. This will of course change once we max out our TFSAs, at which point, we will have no choice but go to taxable accounts. It will take at least a year to max out our TFSAs, so I have time to really think this through. One advantage of withdrawing as much as what makes sense before OAS kicks in is that – as Ed mentions above – it will make our RRSP smaller, which will have the effect of smaller RMD once we turn 72.
In any case, I want to think this through and run the numbers. I am aware of the $2k (for each spouse) pension income tax credit, but I’m not quite sure I know what you mean by “at age 65 you will have combined personal credits ~ 50k/yr”. Are you referring to the “Age Amount Tax Credit” described in this link?
https://www.taxtips.ca/filing/ageamount.htm
If not, can you provide a link, please?
Again, thank you very much for your replies. Please know that it is very much appreciated.
OAS and GIS are on the same form or can be applied for separately, GIS can take 11 months so apply 11 months before 65
Allowance is a separate form, 11 months before you are eligible applies too
Jay,
Forgot to mention if you plan to take out 300k from RRSP’s in 3 years, you will be paying ~48k or more in taxes which should be taken in consideration for the 8yr and post-71 GIS strategy. Remember at age 65 you will have combined personal credits ~ 50k/yr
– OAS and GIS are both on the same form or can be separate forms. GIS can take up to 10 months to process,
OAS 1-2 months, so you should apply for GIS/allowance ~ 11 months before you eligible
– Allowance is on a separate form
https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/guaranteed-income-supplement/apply.html
https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/guaranteed-income-supplement/allowance/apply.html
Hi Ed and Mark,
Thank you very much for your replies. I have actually been reading a lot about this (direct from Gov’t of Canada websites) and I do think we have a decent shot at making it work.
I am in the process of analyzing how to fund ourselves for 7-8 years. We have a few things going for us, I think. First, we are both semi-retired so we have started to take money out of our RRSPs. I am hoping to be able to take out between $200-300K (combined) for the next 3 years. This is on top of around $50+K that I have already moved from RRSP to TFSA (from last year and this year). Then, even before seeing Ed’s article, we have been planning to downsize from a fully paid house in Toronto to somewhere outside the city. I don’t yet know how much cash this will generate, but seeing house prices in Toronto and comparing it to those where we are considering to move, I think it is reasonable to expect at least $250K from this. If we can pull these 2 actions off, then I think we will have enough since we live a simple lifestyle.
When I was doing additional readings, I did come across that retirehappy.ca article, and when I came across that part discussing partial OAS and its effect on GIS, I remember thinking “Hmmm… so it’s even better than the OAS/GIS tables”.
Because of the clawbacks, I will also be reading up on tax-efficient investing. I’ve been a DIY investor for 25+ years, using broad-based ETFs, and although I used to have a non-taxable account (TD Direct Investing), that was only for a short time, and I feel I need to study tax-efficiency, knowing now that that is going to be a key issue once GIS kicks in.
Quick questions on the process of application:
– When should my wife apply for OAS – I mean, how many months before she turns 65?
– Is the OAS/GIS application on the same form, or are they 2 separate forms?
– Do any of these forms include a section for a spouse who is eligible to receive the GIS Allowance?
– If the application for GIS Allowance is separate, when should I apply for it?
Hi Mark,
Good points for Jay. You are right that you don’t use the personal examptions (including the age credit), but these are tax credits of only 20%.
However, most likely your RRIF withdrawals won’t be taxed in higher tax brackets, if you plan it right. The lowest tax bracket is up to $48,500, so Jay and his wife can have $97,000 of taxable income without going into a higher tax bracket.
You are right that it is intersting that the GIS Strategy works even better for people that have not been in Canada for 40 years. In essence, they get full OAS and GIS, even though they don’t qualify for full OAS.
Ed
Hi Jay,
You have the right idea! That all looks like it should work.
The benefit is a bit bigger than you think, becauase GIS is paid out based on prior year income, not current year. When your wife turns 70, her CPP will start, but you should still get GIS since it is based on her income at age 69. GIS probably stops the the year after she starts getting CPP.
This is cool, because when your wife is 70, she is collecting CPP plus you still get GIS! It’s a bonus year.
You have to be careful filling out the forms to apply for OAS & GIS. They normally base it on prior year income. There is a secondary form you can get to have your GIS based on your anticipated current year income, instead of prior year income. This is how you start at age 65 & 63, but collect until 71 and 69.
There may be ways to get more from this. Depending on your tax bracket, it may be worth withdrawing more from your RRSP before age 65, so that your RRIF at 72 is smaller.
You can also expand it with other tax deductions. When you are collecting GIS, you are in a 50% marginal tax bracket. This means almost any strategy that works for high income people may work for you.
For example, we have used leverage (Smith Manoeuvre) to borrow against a client’s home to invest. The interest is tax-deductible, while the investments are very tax-efficient. This provides an extra tax deduction to offset other income and give you more GIS.
Creativity is the key to maximizing your GIS!
Ed
Jay,
Looks like you have it all covered provided you are able to fund yourselves for those 7-8 years. I’m implementing the strategy but most of my portfolio is registered so it going to be a challenge. I don’t want to to live too lean now and regret it later, due to being older and possible less healthy, just for the sake of maximizing government “benefits”. Another issue, is missing out on all those years of personal exemptions of ~ 50k/year and paying more tax after RRIF withdrawals on a larger portfolio.
Note that your GIS may be more than what is in the tables as it is topped up to a minimum income level in the case of a partial OAS:
https://retirehappy.ca/receiving-partial-oas-pension-affects-gis-amounts/
Hi Ed,
Oh, WOW… THIS is exactly what I am looking for. 20+ yrs ago, I was not even thinking of GIS because almost all the literature I read were saying that very few people are qualified to get them, so my brain just said “forget about GIS”. Then, GIS came back into my radar when the TFSA was introduced. What triggered the new interest was the statement that TFSA withdrawals will not be included in INCOME-TESTED benefits like the GIS. INCOME-TESTED… hmm… so it’s just income, and not assets! So I did some reading and slowly came to realize that people who understand how it works can get at least some of the GIS IF they plan ahead.
I’m 59 and my wife is 61. We are both semi-retired and we have started drawing down our RRSPs, and putting them into our TFSAs. Initially, the reason for this draw down was just to withdraw as much as possible while we have very little earned income. So I started looking at the OAS/GIS website, and I started to put numbers into a spreadsheet and I realized that if I have enough cash flow from now until I turn 72, we might just be able to pull this off… THEN, I came across this article of yours. I have to say it is the most well thought-out article I have seen. Not only does it talk about the GIS, but it also talks about the clawback effect of different types of investments, crystallizing cap gains before age 65, etc.
I created an online spreadsheet and put numbers specific to me and my wife. Would you be kind enough to take a look at it? I just want to make sure I understand it and am not missing anything obvious.
Here’s the spreadsheet: https://docs.google.com/spreadsheets/d/1PgGwtcBNzGnCN-6gHoe4xspwGs3zoM1soIsS2JCNMvo/edit?usp=sharing
Thanks a lot in advance, Ed.
Best regards.
Jay
Hi Investing 101,
Glad you found it useful. It is an opportunity with many ways to benefit you. You have to be creative and very deliberate to make it work, though. You can make a great plan and end up with a bit of unexpected income to reduce or eliminate your GIS.
TFSA is a good tool for the GIS Strategy.
Ed
[…] to do this, instead we plan to use our TFSA to optimize our OAS and GIS withdrawals thanks to the 8 year GIS strategy we learned about from Ed Rempel). For any Albertans following along, you can play around with this […]
Vadim,
I’d like to see your excel sheet and what assumptions you made. ie: If the money is borrowed to contribute to the offsetting RRSP, how long is the loan amortization and what are the tax consequences of drawing down the accumulated RSP over x years. Maybe you could upload it to google sheets and provide a link?
Hi Andy,
Yes, you can now earn $5,000 of emmployment or self-employment income and still get the maximum GIS. It’s not $5,000 of taxable income, though. It is very specifically only employment or self-employment income. All your other income, such as pensions or RRIF or investment income still reduce your GIS starting with $1 of income.
In addition to the $5,000, the next $10,000 only reduces our GIS by 25%, not 50%, so you can make up to $15,000 of self-employment income and still get most of your GIS.
This doesn’t really change my article. You can do everything the same as in the article, but also ean $5,000 from your self-employment. Plan to reduce your taxable income to $0, excluding OAS, GIS and up to $5,000 of employment or self-employment income.
Ed
Thanks for the reply, Ed. Appreciate the added insight as well.
Hi Vadim,
Nice creative thinking. There are a wide variety of strategies that can keep your taxable income low. For example, we have had clients where we made a very large RRSP contribution when they were 63 or 64. We claimed the exact amount to give them the maximum GIS every year and carried forward the rest of the deduction to future years.
To get the maximum, you need to contribute enough to offset 7 years of CPP for both spouses plus all other taxable income. This is typically an RRSP contribution of about $250,000, which they can borrow or contribute from non-registered investments.
Your idea to contribute every year works, as well. To optimize, you should contribute a bit more than you expect to need, in case you end up with a bit higher taxable income than you expected. You can deduct the optimal amount and carry the rest forward every year.
Ed
I’ve read that beginning with the July 2020 to June 2021 benefit year, GIS recipients can earn up to $5,000 from employment or self-employment before their GIS is reduced. Will you be revising your article to account for this? I just turned 56 and I’m very interested in pursuing your approach. I’m also self-employed earning a very modest income, so it would make a big difference to me if I can continue to earn $5K a year and still receive the max GIS and OAS. Thanks.
There’s one more strategy you make no mention of that I think would be extraordinarily profitable for someone with low income, with relatively low balance in RSP but a lot of contribution room: If you were to contribute to RSP for 6 years (65-71) in order to fully offset the taxable income from the CPP, then draw down the whole accumulated RSP balance at 71. Sure you’d be missing the GIS credit that year (along with the taxable income on the RSP lump sum) but that pales in comparison to the amount of GIS you gain in those 6 years. I put together an Excel sheet and had to triple check my work before coming to this conclusion.
Hi Steve,
To answer your questions:
1. No. The fact you co-own the rental property is not relevant. Your mother has taken the position with CRA that she owns the rental property by claiming the rental income entirely on her return. If you want to just “take it over”, the first step would have to be to re-file your tax returns and your mother’s since she bought the rental property to transfer all past rental income onto all of your tax returns and off of her’s. This would be like asking CRA: “Please audit me!” Rental income is not tax-efficient and will probably eliminate GIS entirely. Bottom line: Your mother probably needs to choose between the rental property and GIS income from the government.
2. GIS is clawed back from the first dollar of income. $259/month of CPP is $3,100/year, which will reduce her GIS by $1,550/year.
3. GIS is part of the OAS program. If she is not getting OAS, she cannot get GIS. Once she is getting OAS, she can collect GIS any future year that she qualifies.
You need to ask the big question, Steve. If your mother sells her rental property, she can invest the proceeds and she can get close to maximum GIS. She is 63 and probably has a 25+ year time horizon. If she invests the proceeds tax-efficiently for growth and collects GIS, would she have more or less long-term after-tax cash flow?
Ed
Hi Mark,
The $5,000 exemption is supposed to come into affect effective July 2020. Your 2019-20 GIS is before the new increased exemption.
Ed
Hi Ed,
Thanks for the answers.
Here are some clarifications to my questions.
I co-own the condo with my mother. So me reporting the rental income would be viable I assume?
Secondly, my mother JUST applied for CPP… and her monthly gross CPP Projection would be around $259/monthly and she would have no other income besides CPP and rental income.
With CPP started (about 3200/yearly, would she receive full GIS at 65 if I took on rental income and she wont touch her RSP?
Lastly, I understand you need to have OAS in order to apply for GIS. My question is Can she start OAS first then get GIS later? Or does it have to be done at same time?
Thanks for your time in answering the questions.
Thanks Ed,
The other issue that concerns me is that out 2019 and 2020 (to june) GIS is based on my estimated 2019 income (ISP 3041)
It is not clear if they will apply the new 5,000 exemption in this situation and this may result in an overpayment.
Hi Brenda,
“Commuting” your pension means to transfer it to a special type of RRSP called a “locked-in RRSP” (LIRA).
This can help you get GIS, but there are several major considerations in this type of decision. The GIS should be only one of the factors you consider.
If you invest effectively, you can earn a signficantly higher return than you get in your pension. Pensions usually assume a long-term return of 5%/year, but you can get conservatively get 8%/year or more with an equity portfolio. This can be a huge difference over a 30-year retirement.
If you have a pension, your spouse usually gets only 60% of your pension if he outlives you and your kids get zero If you commute your pension, your spouse and kids get 100% of what is left.
Your pension does have a guaranteed payment to you for life, though. Many people keep the pension for that reason.
Commuting your pension means you give up the guarantee, but gain control of your money. Because your money is in your control in your RRSP or LIRA, you control how much to withdraw every year. You can take more some years and less other years.
Since your pension is a government pension, you may not have this option. Most government pensions only allow you to commute your pension before age 55.
There are many major factors to consider, including the guarantee, your potential higher rate of return, estate values to your spouse and kids, the effect on GIS, and other factors.
Does that answer your question, Brenda?
Ed
Hi again Ed
What do you mean when you say commute your pension ?
Hi Steve,
Interesting creative questions to try to get GIS for your mother!
It’s hard to give you a definite answer, because I don’t know her full situation and whether she would actually get GIS if you took these steps. It’s easy to get a bit of other taxable income that can cut into your GIS, such as her CPP.
You have to plan effectively if you want to do the “8-Year GIS Strategy”.
Assuming she would get GIS, here are answers to your questions:
1. You can’t just switch rental income to your name. You would probably have to buy the property from her.
If you could, your mother will effectively be in a 50% tax bracket while getting GIS, with the income above the basic and age exemptions being at a 70% marginal tax bracket (20% income tax + 50% GIS clawback). With your income at $100K, you are in a 43% marginal tax bracket. There should be some tax savings, but not huge.
2. Liquidating her RRSPs before age 65 depends on how much other income she has now and which marginal tax bracket this income would be in. If her income is low, you should be able to withdraw it in the 20% or 30% tax bracket, which is a lot lower than the 50% GIS clawback she would face starting at age 72 when she is forced to withdraw from her RRIF.
3. GIS applies any time starting at age 65, but it is part of the OAS program, so you cannot get GIS if you are not getting OAS. GIS is reduced by taxable income, but not reduced by the OAS.
I hope that answers your questions, Steve.
Ed
Hi Brenda,
GIS is based on family income. Therefore, the GIS is reduced by pension income from either you or your spouse. If you have a large government pension, your income will likely be too high for the GIS strategy.
The only way to do it may be to commute your pensions and then delay withdrawing until age 72.
Ed
Hi Mark,
My understanding is that the $5,000 exemption on employment income is in effect starting with 2019 income for the GIS benefit paid starting July 2020.
All my sources confirm this, including taxtips.ca , other experts I follow, and the budget: https://www.budget.gc.ca/2019/docs/themes/seniors-aines-en.html . However, you are right that the Service Canada web site still shows $3,500: https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/guaranteed-income-supplement/benefit-amount.html .
I believe you should be able to rely on the $5,000 exemption when deciding how much to contribute to your RRSP.
You can also contribute a bit extra to your RRSP and carry forward the extra deduction. This gives you the option to re-file your tax return to claim the extra deduction, if it turns out that the $3,500 exemption is still used.
Remember, this change is only on employment and self-employment income, not all income.
Ed
Hi Ed, This question is for my bother who is turning 63 this year in December. She has about 93k in RSP with no company pension but rental income. Now, I am thinking by time she is 65, I would take on the rental income (1800/monthly) and added to my income (current income is say 100k/year).
questions are:
1) Would it be smart for me to take on the rental income to have her be in a very low tax bracket?
2) Should I liquidate her RSP in portions by age 65? maybe 31k each year? so there is not worries about having reduced GIS payments past 72?
3) Can GIS be applied at later year of life even though shes getting her OAS?
Thanks
Steve
Hi, In your article, you stated that this will not work if you receive a government pension. Question, will it work if your spouse receives a government pension?
I called Service Canada today to confirm the new 5000 + 50% of the next 10,000 income exemption starting in July 2020 will be based on 2019 income. They stated they are still using the 3500 exemption and knew nothing about the new amounts. Do you know how I can get confirmation so I can setup my offsetting RRSP contributions before the end of February for the 2019 taxation year?
I found it was given Royal assent here: https://www.parl.ca/DocumentViewer/en/42-1/bill/C-97/royal-assent
“Division 7 of Part 4…” but it does not explicitly refer to 2019 income.
Hi Barry,
Yes. As long as you are age 71 or less and have RRSP room, you can contribute to an RRSP. Withdrawing from a RRIF does not affect your ability to contribute to an RRSP.
Ed
Thanks Ed, that’s quite a relief!
Louise
Hi Louise,
An RRSP contribution of $11,000 should offset the $11,000 taxable capital gain, so it should not affect your GIS.
You need to be careful about who claims the RRSP deduction. It should ideally be the same person that has the capital gain. GIS is based on your family income. If you have a capital gain of $11,000, RRSP deductions of $11,000 for your husband will not fully offset it. Your husband has only $8,500 income (CPP) that affects the GIS, so the maximum RRSP deduction he can make that will give you more GIS is $8,500.
The first year you apply can be different, as well. Service Canada calculates GIS based on your prior year tax return. However, in the year you retire, your taxable income for the prior year may be too high to get the full GIS. You can fill out an income declaration form with your OAS application to declare the income you expect for the next year and then Service Canada will base GIS on your income declaration form.
Normally, you should list all income and deductions you expect when you fill out the income declaration form. However, it might not have any consequence if you skip the capital gain and the offsetting RRSP deduction. They offset each other, plus they generally don’t necessarily expect you to know capital gains before the year ends. Many investors get capital gains from T5 slips that they only get after year-end.
Ed
Hi Betty,
The short answer is that your analysis is correct. If you contribute CPP to your RRSP, your deduction offsets the CPP income so it does not affect your GIS income.
You will have to be careful in the first year to declare to Service Canada that the income you expect at age 65 includes both the CPP income and the offsetting RRSP deduction. Service Canada usually uses your prior year tax return. In the year you retire, you can fill out the the income form together with the OAS application to declare the income you expect at age 65.
You might also be better off delaying starting your CPP for 3 years, so that your RRSP can offset the CPP income all the way until age 71. This could get you 3 more years of GIS income.
Ed
Hi Wayne,
Yes, in general, CPP starting at age 70 would reduce your GIS income. This would be only the last year of the “8-year GIS Strategy” and usually does not wipe it out totally.
There are possible strategies to offset it. You would need tax deductions to offset it.
For example, you could contribute the CPP to an RRSP. We have also had clients make RRSP contributions earlier where they deferred claiming the deduction until CPP started at age 70. We have also had clients with tax-efficient investments where the investment management fee charged by their portfolio manager is tax-deductible and offsets the CPP income.
When you look creatively at your overall financial picture and your goals, it is surprising how many creative options there sometimes are.
Ed
Hi Frank,
GIS is reduced by 50% of taxable income. For your self-employment income, it is reduced by 50% of the net income – after expenses. Even with a low income, you are effectively in a very high income tax bracket, so it is worthwhile for you to claim all the expenses you can. If your expenses are as high as your gross self-employment income, then it does not affect your GIS income.
Ed
I converted part of my RRSP to a RRIF and withdrew it all this year. Can I still contribute to the RRSP portion in future years or to a totally separate RRSP?
Hi Ed,
Sorry if this is a repeat – not sure if the original posted. There’s one extra sentence just before the end.
I was laid off from a good longtime career in late 2017 and finished an EI claim at the end of August.
I’ll be 64 in late November and am delaying my DB pension to age 65, as it’s in a precarious industry and we anticipate a cut in benefits. My husband has been disabled for some years and receives about $8,500 in CPP plus full OAS.
I had read about your GIS strategy, so before my EI ended, my husband and I applied, and were approved, for about $900 a month in GIS/Allowance.
The problem: my siblings needed to sell a family property this fall, leaving me with a capital gain of just under $22,000, of which about $11,000 is taxable.
I plan to buy an $11,000 RRSP in hopes that it will cancel out the capital gain.
My question: Should I tell Service Canada now about the capital gain, which will drop our income this winter, or wait until I file my tax return in hopes of a less severe outcome? I’m not quite sure how the capital gain will affect GIS/Allowance despite the RRSP purchase.
My husband also has thousands in unused RRSP contributions.
Thanks in advance for your help.
Hi Ed,
Thank you for your article. I have learned a lot. This is what i have planned.
My husband is 65 years old and receiving about $6,300/year in CPP. He is also receiving maximum GIS because he buys the same amount of RRSP to offset the CPP income.
I am 64 and receiving the maximum allowance until next year that will convert into GIS. I have applied to start receiving CPP when I turn 65. They say I will get $770 per month. I have room for about $30,000 RRSP;therefore, I would buy $9240 to offset the CPP income and still get the maximum GIS for the next 4 years. Is my analysis ok?
Hi Ed,
How do you deal with the income you will receive at 70 from CPP? There will be clawbacks on the GIS once the CPP income begins correct?
Hi Ed,
If I make $5000.00 in self`employment in 2019, how will this affect our GIS? Is GIS calculated on the gross or net income?
Appreciate your work!
Hi Elizabeth,
This exception is specifically for employment or self-employment income. They are allowing you to work a bit.
It would be nice if they allowed it for other types of income, so we could use it for all kinds of creative solutions, but they don’t.
Ed
Regarding the $5,000.00 and $10,000.00 exception, does it include any type of income like for instance RRSP withdrawal or CPP income or just income from employment?
Hi Mark,
My understanding is that the exemption for $5,000 of employment income in the calculation for how much GIS you qualify for is effective for the July 2020-June 2021 payment year. For most people, this is based on 2019 income.
GIS income is normally based on a 6-month delay. Your 2019 taxable income determines our July 2020-June 2021 GIS income.
In your case, if you are filling out the ISP 3041 form to show that your 2019 income is expected to be different than your prior years, you July 2019 payments should still use the former limit of $3,500 of employment income.
The exemption of $5,000 plus 50% of the next $10,000 is not the same as a $10,000 exemption. If your employment income is $6,000, then only $5,500 of it is exempt ($5,000 + 50% of $1,000).
Ed
If the GIS/allowance is based on the current year’s (2019) income estimate (via ISP3041) would the new income thresholds apply to 2019 benefits since the 2019 income will not be reported until after April 2020?
Why don’t they state the 1st 10,000 is exempt rather than 5,000 is exempt plus 50% of the next 10,000?
Hi Mark,
The short answer is, yes, it will reduce your income for GIS purposes, but only if you have other capital gains this year.
You can claim a capital loss if you have worthless shares and it reduces your capital gains income for the current year. It is part of line 127 “taxable capital gains”, not line 251 “losses of other years”.
However, the capital loss will only reduce other capital gains this year. You can’t show a negative capital gains.
Ed
Hi Karl,
I like your creativity!
Yes, you can defer your CPP to age 70. Your CPP disability will stop at 65, so you will have 5 years without CPP.
When you apply for OAS, answer “yes” that your income will be lower at age 65. Then they will send you the ISP3025 form (https://catalogue.servicecanada.gc.ca/content/EForms/en/CallForm.html?Lang=en&PDF=ISP-3025.pdf ) where you can tell them the income you expect at age 65.
The important point is that they will start at age 65 based on your estimated income, not on your age 64 actual. Then make sure you are roughly right or they may take it back.
You can then contribute to your RRSPs at age 65 to bring your taxable incomes down to the amount of OAS you get. Taxable income of zero (but they exclude OAS income in the calculation). You can earn $3,500 employment income and still get the maximum GIS ($5,000 if the budget is passed).
Plan this right and you can get maximum GIS for at least a couple years, Karl.
Ed
If I claim a capital loss on schedule 3 for worthless shares per Section 50(1) of the Income Tax Act would that reduce Net Income for GIS purposes? I think only losses from prior year are deducted after net income for taxable income, correct?
https://www.theglobeandmail.com/globe-investor/investor-education/my-shares-are-worthless-now-what/article16287668/
Hi Jim,
Sorry to breat the bad news, but my understanding is that capital losses from previous years will not help you with GIS.
The clawback on your GIS income is essentially based on net income, but not taxable income. Capital losses from other years are deducted after net income and before taxable income.
Ed
Hi Barry,
I like your creative thinking! Creativity can be very profitable with the GIS Strategy.
To answer your questions:
– Moving expenses are only deductible if you move to take a job. Therefore, moving deductions are limited to the employment income in a job closer to your new home.
– Yes, you can offset all of your income with RRSP contributions. If your taxable income is zero and your wife’s is only $5,500, you will get close to the maximum GIS.
Suggestions for you:
– It may be better to just withdraw what you need from your RRSP, instead of converting to a RRIF. Any amount left in your RRIF creates a minimum withdrawal you have to take whether you want to or not.
– If you have enough RRSP room and are an equity-focused investor, it’s probably best for you to start CPP early. This article should be helpful for you: https://edrempel.com/delay-cpp-oas-age-70-complete-answer-real-life-examples/ .
Ed
Hi Ed, my net income for tax year 2018 was $ 19,803 and my wife’s net income was $ 6266 for a total of $26,609. My income is a result of investment income and CPP Disability benefits. My wifes income is regular CPP benefits and investment income. I am turning 65 in Oct 2019 and my wife will be 62 in Jan of 2020. I will receive GIS of $ 207.84 and she will receive an allowance of $ 159.34 based on our 2018 income. I have been advise that at the age of 65 my CPP disability benefit will automatically roll over to a CPP retirement benefit. My first question is can I defer my CPP or am I obligated to take it at age 65 ?
I am in the process of applying for the OAS and GIS and on the application for the GIS there is a box to check off if you have a reduction in pension income in the next two years. As I will be going from a CPP disability pension to the regular CPP pension I will answer yes which will trigger them to base my GIS/Allowance on the current year 2019. My next question. If I make RRSP contributions amd my wife also does can we reduce our net incomes to 0 for 2019 ? And if we did this would we receive full GIS and ALLOWANCE for both the period of November 2019 ( OAS/GIS/ALLOWANCE starting date ) to June 2020 and the period July 2020 to June 2021 ( based on 2019 income ) ?
Hi Ed.
If I have capital losses from previous years to offset a present realized capital gain would this affect the GIS amount?
So in other words, when doing a tax return, is the GIS calculated on Total income, or on net income?
My wife is 66 and I am 64. Here is my plan, based on all the advice gleaned from this discussion:
During this year, 2019, we will convert a portion of our RRSPs to RRIFs and withdraw all of the RRIF funds this year, providing enough cash for this year and some left over to provide some towards the lean GIS years. Then, as Mark says in his reply to Lily, we will have a reduction in pension income.
During 2020-2014, we will have minimal income beyond OAS and GIS. My wife already receives a small foreign pension of about $11K/year. It is eligible for pension splitting, so she will split 50% to me each year. Half way through 2021 I will start to receive a similar small pension of about $7K/year. I have sufficient RRSP room, although she has none, so I can shelter all of my pension and 50% of hers (by virtue of pension splitting) in my RRSP. I will make an RRSP contribution each year to offset this foreign pension income.
I plan to start CPP at 70, as suggested. But if I start earlier, say at 67 or 68, can I simply shelter it by making RRSP contributions/deductions during the years when I receive CPP?
Question: can we deduct moving expenses? The ISP-3025 form says so, but on the tax return, moving expenses are not applicable without employment income.
Question: can I contribute even more to my RRSP and thereby shelter the remaining 50% of her pension? For example, I could make an RRSP contribution equal to my entire income (OAS and pension) plus 50% of my wife’s pension (the amount of her pension split to me). That way, our combined income would not exceed the threshold for maximum GIS. It would look weird on our tax returns but may work for GIS purposes.
Mark, I agree.
Ed
Hi Kenny,
The 8-Year GIIS Strategy may not work for you with a 10-year age gap.You can’t both collect the OAS (or Allowance) until both of you are 60. In your case, the other will be 70 and one year from having to convert RRSPs to RRIFs.
You may be able to make it work for 2 years, which is probably not worth the effort.
It could work if the older spouse drained your RRSP before age 70. You have to work out whether or not that is beneficial, since you would be tax sooner on your RRSPs. It probably is not worthwhile if your RRSP is large.
I hope that’s helpful, Kenny.
Ed
RAV:
If you convert your RRSP to a RRIF, you can claim a reduction in pension income in section F of the GIS application, in which case your GIS will be based on the current years income rather than the previous. You can then withdraw the last of your RRIF the month before you turn 65.
Whether you decide to offset CPP income with RRSP deductions is up to you. You will still need to withdraw after age 71 reducing GIS by 50 cents / $1
It makes no difference if you rent or buy, GIS is based on income only, not assets, however you may need a larger income if you are renting
Hi Ed,
Thanks a lot for your article. While I was investigating and calculating my retirement plan, I realized I could get GIS for so many years as long I have money to survive ‘lean years’. Your article relieved me of the doubt I had about the strategy. I do have some questions though and thanks in advance for your help. In the year I turn 70 my income will not be 0 as I will have 6 months of CPP. 1) Are they cutting my GIS right away or it will affect it only the year after? Then the year I turn 72 I will have CPP+RRIF which will be enough to kill by GIS but the question is are they cutting my GIS that year on only stop it the year after?
Again thanks a lot your wisdom
Hi Ed,
Thanks for the great information. As you suggested, on your video, I am planning to withdraw my RRSP ($125000) before the year I turn 64. Since my RRSP account is going to be ZERO by then, do I still have to offset my CPP income by using my RRSP room and buying RRSP from age 64 to 71?(I am 60 and started my CPP)
My second question is about maximizing the GIS rate by purchasing a condo vs renting. Since the GIS rate is based on taxable income, not asset, am I correct that for the low-income people, with life long GIS strategy, purchasing a property is much better than renting ?
(assuming a person has the cash to purchase the property outright).
Thanks a lot
Kenny,
If one spouse is 65 or over, the other spouse can receive the GIS Allowance starting at age 60 until 65 when they would receive OAS and regular GIS. See Table 4 here: https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html
So, in your case, one spouse would need to be 70 before the other spouse would be eligible at 60.
Great insight Ed. An interesting read indeed. Just a quick question – how would your planning change if the age difference between the spouses are 10 years apart, for example, since we are not “single”, nor would we be “65 and over” together at the same time in order to qualify for GIS? Thanks!!!
Hi Hong,
Glad you found it helpful.
CPP alone reduces your GIS, but does not usually wipe it out. In most cases, it is being forced to withdraw from your RRIF at age 72 that eliminates your GIS. You collect an extra year, so most people can collect from age 65 to 72 inclusive.
The number of years you can collect GIS with good planning varies by person. It could be 6 or 8 years, or for life.
Ed
Hi David,
Interesting and good thinking. You should compare the level of benefit for each of these periods, since your ability to keep your taxable income low for many years may be limited.
Can you plan to keep your GIS running after age 71? For example, the GIS survivor benefit is only half the benefit and clawback of GIS (generally). Would you be better off withdrawing from RRSPs from age 60-65, sacrificing the survivor benefit, in order to get GIS more years after age 71?
Ed
Glad to help! Remember to budget for a few months delay after submitting the ISP3041. It used to be 9 months but last time I checked they had it down to 3 . Sometimes writing “URGENT” on the form will help. Payments will be retroactive to January.
Hi, Mark,
Thank you so much for your prompt reply. Now I understood why I should convert RRSP to RRIF, I was confused with converting at age 71. I really appreciate your expertise, it helped me a lot.
Lily,
As I said, you should convert your RRSP to a RRIF in Dec/19 because the RRIF is considered PENSION income which will be reduced to zero in 2020. If you read Section F of the GIS application, it states “…a reduction in pension income*” and on the bottom of the next page the * defines what is included in Pension Income.
You can download the form here: https://catalogue.servicecanada.gc.ca/content/EForms/en/Detail.html?Form=ISP3025
The RRIF also allows you to get the $2000 pension amount credit at 65 or older, whereas the RRSP does not.
Hi, Ed,
Thank you very mych for your reply.
So if I withdraw all my RRSP ($20000) in 2019, and send in form ISP 3041 in 2020, the Service Canada will calculate my GIS based on my year 2020’s income, which is 0, not my 2018 or 2019’s tax return income? I called Service Canada two weeks ago, one staff told me that they adjust GIS by current year’s income only for “emplyment income”, not for divident or RRSP, for which they still look into 2018 and 2019’s tax return income, but the other staff told me otherwise, that I can file form ISP 3041, they will consider the 2020 income ,no matter how much RRSP I withdrew in 2019. I am a little confused about their rules.
Gail,
GIS is based on your combined income, excluding OAS, so to maximize GIS you could defer RRIF withdrawals until age 71 of the younger spouse.
The amount of GIS will depend on your CPP and any other income (3500 employment income exempt) and will reduce to zero over $24.000 icome
Look at Table 2 here: https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html
For example, if your combined CPP income is 12,000/yr, you will receive $502 (251 each)/month
Any RSP/RIF withdrawals or other income will reduce GIS by 50cents/$1
For example, if you withdraw $1000 from your RSP, your combined GIS will decrease by $500/yr
I am assuming you have 40 years Canadian residence, if not the benefits will change.
Hi Ed, my husband and I are only on CPP and OAS, I am 68 and will be 69 July 2019, my husband is will be 67 in March 2019. I have approx, $105,000 in RRSP and he has $86,000 in his RRSP. Should we RRIF them or withdraw all, if we withdraw them would we be eligible for any GIS?
Lily,
If you draw 1,000 each year, your GIS will drop by 500 each year. Better to convert the rrsp to a rrif in dec/2019 and withdrawal all of it. Complete the GIS application and indicate in section F that you retired or had a reduction in pension income. Then call Service Canada and request form ISP3041 to estimate income for 2020. Send the ISP3041 form in after you have retired or made the withdrawal and they should calculate you GIS based on the estimated income for 2020 rather than 2019 or 2018 income.
Hi, Ed,
Thank you very much for your useful article.
I will reach 65 in Dec, 2019. I had divident of $20000 withdrew in Dec 2018. I have $20000 RRSP and $1000 interest to be withdrawn. In year 2020 and afterwards I won’t have any divident or RRSP or interest left. Will my GIS be effdcted for year 2020? Should I withdraw the RRSP slowly, say each year about $1000 instead of drawing at once before I retire? Since withdrawing everything at once will only effect 1 year of my GIS?
Hi Ed,
Thank you very much for publishing this strategy for the average Joe.
Although you addressed in the previous post, I think this strategy is only 6 years. you start get GIS from 65. by the time you turn 71, you already have collected 1 year of CPP already so the 7th year is questionable. Am I missing something?
Very timely article as I was also looking at if I could qualify for the ” Allowance for the Survivor benefit” GIS between 60-64 using the same strategy of minimal taxable income year at 59.
I am currently collecting CCP survivor pension and dividend income from CDN stocks in a non regitered accountfor an estimated taxable income of $28K but can adjust the stock portfolio to meet the GIS requirement. I will have enough “savings” for the additional 5 years without taxable income
I was also considering minimizing my taxable income next year to let my university bound daughter class of 2020 get additional OSAP grants and loans next year.
Summary
Age 57-60 minimize for OSAP benefits
Age 60-65 minimize for GIS survivor benefit
Age 65-71 minimize for OAS benefit
Is there additional risks or considerations following your strategy to include the Survivor GIS benefits
Thanks
David
Hi Hyip,
The 8-Year GIS Strategy is a strategy I figured out. I have not seen it discussed on any other blog or discussion forum.
If you have comments, make them here and we can try to get a discussion going.
Ed
Some GIS discussions here:
https://www.canadianmoneyforum.com/forumdisplay.php/13-Retirement
Excellent website you have here but I was wanting to know if you knew of any
discussion boards that cover the same topics discussed in this article?
I’d really like to be a part of online community where
I can get advice from other knowledgeable individuals that share the same interest.
If you have any suggestions, please let me know. Thank you!
Hi Barry,
Decisions about when to start CPP and how to maximize your GIS are different for everyone. You have to look at your income in various years and look at the tools you have, like you have been doing in your question.
Whether to delay CPP can be based on maximizing GIS, but also on other factors, most specifically how you invest. I have not seen any other articles anywhere about when to start CPP that include the 2 most important issues – maximizing GIS and how you invest. Details are here: https://edrempel.com/delay-cpp-oas-age-70-complete-answer-real-life-examples/ .
It works well to defer RRSP deductions to get more GIS. While you are under age 65 and your wife is over 65, you don’t get GIS but can get the Allowance for people aged 60-64. However, the clawback is only 25%, not 50% like the GIS. It may be better for you to wait until you turn 65 to start using your RRSP deductions. This can help you get full GIS longer than age 68.
The larger GIS for your wife because she has not been in Canada long enough to get full OAS gives you more potential benefit from effective planning to get the larger GIS.
Ed
I found the reason for the GIS payment inconsistencies in the 2-10K income range:
It is due to two top-ups allocated in the 2011 and 2016 federal budgets which only affects people in that income range.
Read flashstorm’s reply in this thread:
https://www.reddit.com/r/PersonalFinanceCanada/comments/6djzks/gis_guaranteed_income_supplement_clawed_back/
HI Ed,
Although you recommend allowing CPP to grow by 42% by deferring it to age 70, I feel that the optimal time to start taking CPP is age 67; I would rather not wait until age 70. This means I would have CPP income while in some of the GIS years, but I would put it all into my RRSP each year. Or do I need to make the total RRSP contribution before starting on GIS? I would also split 50% of my wife’s pension income to me. This pension is already started. It is eligible for pension income splitting even to a spouse less than age 65 (me). I would put all of this 50% into my RRSP as well. Fortunately, I have just enough RRSP room to make this work for 4 years. We cannot shelter the 50% remaining in her hands, as she has no RRSP room, so there is some unavoidable GIS clawback.
Another wrinkle is that she is on less than full OAS due to not living her whole life in Canada, so the GIS may be even higher than otherwise. But does this fact have any negative impact?
What do you think of this?
Ed,
You said: “The allowance for you age 60-64 is clawed back at roughly half the rate of the GIS – 25% instead of 50%.”
However when I check table 4 at https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html
The clawback for allowance is between 88% and 56% and 0-13% for GIS for incomes between 2000 and 10,000. After 10,000 it is 25% of GIS and Allowance for a total of 50%, below 10,000 the combined clawback is between 65% and 99.6%!!!
For example,
at 4,000 income you would receive $540 GIS and $892 Allowance
at 5,000 income you would receive $530 GIS and $819 Allowance, which is $996 LESS or 99.6% clawback
Are you aware of some special rules that affect the 2-10k income ranges?
Hi Barry,
There is no problem with having a negative number in section 9.
For subsequent years, they use your tax return unless you file another ISP-3025.
Any time you file an ISP-3025, it should be a good estimate of your tax return for the next year. The purpose is to allow you to notify Service Canada ahead of time if there is a significant change in your income.
Ed
Hi Ed,
Thanks for your reply.
The root of the problem is that the only income we have goes in section 2, while the only deductions we have go in section 9.
So, for the first year, on the form, I would get a positive number in section 2, lets say $11K because my wife has this much pension income (not RRIF) already started. The only way to offset this and reduce the GIS clawback is through an RRSP deduction (or moving expenses my apply in our case) under section 9, but that would make this section negative. Is a negative number allowed in this section to offset a positive number in section 2?
For subsequent years, do they use my tax return calculation and NOT the calculation on form ISP-3025, or do they just pull the numbers from our tax returns and still do the calculation as per ISP-3025?
Hi Barry,
You can enter your RRSP deduction under section 9 “Other Income”. Look at the second page that explains section 9. It is “Other Income Less Other Deductions”. RRSP deductions are included in the list.
For the first year, they will use this form. After that, they will use your tax return, unless you fill out this form again.
Ed
Hi Ed,
You state that “the GIS clawback tax is based on family net income, which is after tax deductions”. However, the form used to apply for GIS (ISP-3025) does not use the same definition of family net income as is used on the T1 form, so it does not take into account the deductions one would use on the T1, such as RRSP deductions. We have some pension income already started but I have enough RRSP room to shelter it, per the T1. However, the GIS application (ISP-3025) has nowhere to include the RRSP deduction, so I end up with a larger family net income. Am I missing something? Does the GIS get reconciled somehow to use the same definition of family net income as is used on the T1 form?
I must be missing something with the allowance/GIS clawback:
With Zero income a couple gets a total of 2266 (536 GIS + 1133 allowance + 597 OAS)
With CPP of 7200/year their total income would be 2350 (503 GIS + 650 allowance + 597 OAS + 600 cpp)
The reduction in GIS/allowance is 86% ((536+1133 – 503+650)*12 = 6192 6192/7200=.86
Doesn’t seem right……
Hi Perry,
Mark’s answer is correct. The allowance for you age 60-64 is clawed back at roughly half the rate of the GIS – 25% instead of 50%. To plan for the maximum GIS, it is often better to focus your non-taxable income and carryforward deductions on the years starting age 65. You get a bigger bang for them after 65, if you can get GIS. Only if you don’t expect to be able to get GIS later is it normally worthwhile to plan to collect the allowance before age 65.
I hope that’s helpful, Perry!
Ed
Hi Daniel,
You are correct that it may be only a 6-year GIS Strategy for some people. Every person is different, depending on your income sources, tax deductions, and your creativity in tax planning.
Starting CPP at 70 will likely reduce, and possibly stop, your GIS starting the following year. I have found a few creative methods to provide tax deductions to offset CPP for a couple of years.
Rather than get into all the possible scenarios, most people can no longer get GIS after age 72 because their RRIF kicks in. It is usually too much to get any GIS.
Ed
Thanks so Much Mark, really appreciate the responses, learned allot today 🙂
Not Both, only table 4 applies when you are 65+ and your spouse is 60-64. When your spouse reaches 65 then table 2 or 3 will apply/
Note that, you must be receiving the FULL OAS which requires 40 years residence in Canada for these tables to apply,
Thanks Mark!! So would I be correct to say if our incomes are below the maximum, would we be entitled to both as described on that webpage….eg: .”If your spouse/common-law partner does not receive an OAS pension” And the “allowance”as mentioned in the earlier email….or does the “If your spouse/common-law partner receives the Allowance”apply, sorry for all the questions but this is very confusing and we want to plan for the future…thanks in advance!
No, both do not need to be 65. If one spouse is receiving the full OAS and the other spouse is between 60-64 years old they can receive an allowance – see table 4
https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html
Hi Ed, love reading your articles! Thanks for sharing!
I do have a question,regarding the GIS.
For married couples, do both have to be age 65 or older for one to collect the GIS? Or could my wife collect it when she is 65 years old and me only being 60 years of age?
Thanks in advance!
Hi Ed,
I like this strategy and follow you regularly. I was wondering how you can get 8 years of full GIS since you can’t delay the CPP (RRQ in my case) past 70…
I understand that if I have zero taxable income from the year I turn 64, I would be entitled to full GIS at age 65 and thereafter, but how could I receive full GIS after I turn 70 when I receive my RRQ pension?
Thanks for clarifying for me.
Hi Golden,
Glad you found it helpful.
My best guess about the GIS in 20 years is that it will most likely be there. The amount is targeted based on a theoretical poverty level.
The OAS itself is likely to be reduced or clawed back either at a lower income or at a higher rate. OAS is paid entirely from the general tax revenues of the government. Once all the baby boomers retire, there will be only 2.5 people working for every retiree. I don’t see how the existing OAS will be affordable.
There is a tendency of the government to claw back more and more programs. The are increasingly trying to prevent people who save and invest from getting government benefits. It is likely there will be more clawback programs available for seniors in 20 years than now.
You will need non-taxable cash flow to make the GIS Strategy work. It is unlikely that your TFSA alone will be enough to get the full benefit.
The reason married people don’t get much more GIS than single people is that the married people also get double the OAS. The OAS and GIS are all one program. The maximum they can get is $27,000 for a couple ($13,000 GIS + $7,000 OAS each), while single people can get $18,000 ($11,000 GIS + $7,000 OAS). Married people get 50% more.
Yes, both married and single people need to have zero taxable income from age 65-71 to get the maximum GIS for 8 years. It takes a lot of planning to make the 8-Year GIS Strategy work fully. You can easily get a bit of taxable income from various sources, expecially dividends, capital gains or tax slips from non-registered investments. You also need to plan to have enough non-taxable cash flow to be able to live the life you want for those 8 years. The benefits for your entire retirement can be significant if you can make it work fully.
Ed
This is exactly what I was looking for. I was floating this concept before reading this with my FP as I wasn’t sure how it all worked. Only concern is if the government will make changes that could effectively get rid of this by the time I get to 65 which is still quite some time for me as I’m 47. The TFSA contribution limit will be key here… the Liberals cutting the limit from 10K sure didn’t help. Thank you for this as I can now crunch some numbers. I’m always baffled why couples get so little more combined versus a single person (12.6K vs 10.5K). I assume both couples will have to have 0 income between 64-71.
Hi Grace,
If you are investing in interest-bearing investments, then it is probaby better to delay CPP & OAS. They increase by 8.4%, but that is not their rate of return. It is 8.4% higher payout for a few years over an average life expectancy. The rate of return is closer to 5%, but that is still higher than you probably get on your interest-bearing investments.
This may be different if you invested less conservatively.
You would have to work out the options to see which is better for your strategy. The key factor might be the upper limit of your current tax bracket. If you withdraw $30,000/year and that pushes you into a higher tax bracket, then it is probably better to take less. Take only the amount you can take without going into a higher tax bracket.
The issue is not really tax on your estate, but the higher tax bracket you will probably be pushed into in the future. The minimum RRIF withdrawal is increased every year until it reaches 20%/year withdrawal at age 95. Your RRIF will eventually deplete with the high withdrawal rate.
My services and fees are here: https://edrempel.com/become-a-client/ .
I hope that’s helpful, Grace!
Grace
Hi Simon.
It is an 8-year strategy, because you actually get the GIS at age 72, as well. It is based on the prior year’s income, so you get it the 8th year.
By the way, isn’t it 2 more years till you quit – age 62 to 64? 🙂
To be clear whether a Financial Plan will be beneficial for you, I would need to know more about your situation and what you want from your life. Having said that, if we can plan to get the full GIS Strategy, that exta 12% alone is $12,000 and more than pays for your Financial Plan.
The best way to find out is with a Free 30-Minute Consultation. You can tell me what you feel you may need help with, I’ll fill you in on exactly what I do, and then we can decide together whether or not we are a fit to work together. It is here: https://edrempel.com/free-30-minute-consultation/ .
Ed
Hello Ed,
Great strategy. I am 62, plan to work 1 more year and quit at 64. After some calculations I think I can get 88% of the full amount due to some investment and interest incomes. Do you think it’s still worthwhile to do this plan? Isn’t this a 7 year instead of 8 year plan? There is only 7 years from 65 to 71.
Thanks,
Simon
Wow, thanks for your very promp reply, Ed. My concern with keeping the rrsp intact till age 70 is that the higher amounts have to be kept liquid to pay the riff min withdrawal than if I withdraw it early and pay tax on it now. Meanwhile the cpp and oas are growing at 8% per year and that is more than I can grow my rrsp at, given current interest rates. If I start reducing my rrsp by about $30,000 a year for the next 5 years that will reduce my min withdrawal amounts by about 10,000 per year. I don’t save on tax, rather it smoothed out the income to be the same before cpp/oas and after I start collecting it. Also if I take out the min rif amount on the total rrsp amount, I will die with a large amount left and it will then come into income for the estate all at once with a very high tax rate. I would be interested in your services and fees in case I decide to pursue this issue further. Thanks for your help. Cheers Grace
Hi Grace,
The CPP is increased by 8.4% PLUS the CPI for every year you delay taking it after age 65 up until age 70.
Whether or not it is a good idea depends on a few factors. I wrote a detailed article about delaying CPP which is the only article I have ever seen that includes one of the main factors – how you invest: https://edrempel.com/delay-cpp-oas-age-70-complete-answer-real-life-examples/ .
Your idea of deregistering your RRSP early may or may not work. It depends on your marginal tax bracket that applies to the withdrawal vs. your tax bracket in the future with the RRIF withdrawal.
A more effective strategy is often to withdraw as much as possible in the lowest tax braket is a way that gives you the sustainable amount that you need for your desired lifestyle.
I hope that’s helpful, Grace! Post a follow-up question if my explanation is not completely clear for you.
Ed
Do you loose the benefit of the CPI increases with cpp/oas if you delay taking them till age 70? I know you get the .06/.07 increase for delaying but is that in addition to the CPI increase or instead of it?
I have a rrsp that is approx $650,000 and was planning on de-registering large parts of it yearly till I’m 70 so I can reduce the amount of the minimum rif payment at 70 and control more of my rrsp investments by reducing the amount required for the minimum rif payments. This situation didn’t appear in your examples. Do you agree with my plan? I’m single and have just retired and have delayed my cpp/oas.
Hi Kurt,
You can withdraw $4,000/year ($2,000 each) tax-free, but they will still affect the GIS clawback.
You get a pension tax credit to offset the income tax. However, it will add $4,000 to your taxable income, so you would lose $2,000 of your GIS.
Ed
Hi Ed,
Very interesting idea. I wonder though if additional $4000 per year can be withdrawn under RIF pension tax credit rules for a couple for the age of 65-71 without affecting the tax status of your outlined strategy. This would require transfer of RSP to RIF. Or is there something that I may be missing here?
Hi Chris,
Intersting idea. I’ll do some more research on it. I have never seen a section 85 rollover done this way. Not sure if it applies, since that is not it’s intent. It is intended to be for an estate freeze of an active corporation.
The problem with your idea is that investment income inside a corporation is taxed at the highest marginal tax rate. You would pay 50%+ tax inside the corp on your investment income, including the taxable half of the capital gains. That is as much or more than the GIS clawback tax.
There might be a creative solution with lump sum withdrawals every few years to dividend out the taxable investment income from the corporation to you.
We have done this sometimes with RRSPs. Instead of taking annual income from a RRSP or RRIF, we would take a lump sum every few years so the client can collect GIS the years in between.
Ed
Hi Ed,
After reading your article, I was thinking about the following scenario, and I’m wondering if it makes any sense to you:
If a couple’s only income was from a large non-registered investment portfolio, would it make sense for them to transfer this portfolio tax free under section 85 to a holding corporation (either a holding company they already owned or setting up a holding company) and then draw money from the corporation tax free from ages 64 to 72 through the shareholder loan created by the transfer under section 85? This would seem to accomplish the goal of creating zero taxable income on their personal tax returns and give them a lot of flexibility from a cash flow perspective year to year. Furthermore, any capital gains from the sale of investments inside of the corp would increase the capital dividend account by which they could draw additional money tax free.
I know there would be costs to executing the section 85 and annual compliance costs which may not be that bad if you just hired an accountant to file the corporate tax return (i.e. you tracked the investment portfolio’s income and then just supplied the summary to the accountant). The professional fees would be deductible to the corporation as well. At the end of the day, it seems like you could still end up ahead of the game (GIS less professional fees).
I’m just wondering if this makes any sense at all and if it is even possible? Perhaps this is not the optimal scenario, but would it work?
Thanks,
Chris
Hi Mark,
The personal exemptions are not at all the same as GIS income. GIS income is tax-free cash. The personal exemptions are only a tax credit on which you can save between 0% and 20% tax.
The cash value of the personal exemptions (including the personal and age credits) can never be anywhere close to the GIS tax-free cash.
Ed
Hi Mark,
Good point. You can work until the end of the year you turn 64. Fill out the income form and you can get full GIS.
I didn’t mention it, becauase you have to be careful with the income form. Income Security does not necessarily go with your figures.It can be a problem if you end up having income at 65 that you also had at 64, but did not put on your form.
Having zero taxable income at 64 is safest, if you can do it. You also avoid tax that year, if you can do it.
Ed
One must also consider the lost personal exemption room and lack of growth in their TFSA or cost of borrowing to fund this strategy over 8 years.
For a couple, the personal exemptions are almost 40,000/year but only OAS income of approximately 14,000 is being offset which represents 26,000 lost per year in tax free income.
“2. Retire at age 63 or sooner. Starting January of the calendar year you turn 64, you need to show taxable income of zero.”
When you apply for GIS, there is a section F where you indicate you will retire that year and will have a reduction in income. This triggers them to send you a special form to base GIS on the current year instead of the previous year’s income
This should allow one to work right up to age 65.
Hi Gail,
Your figures are correct.
However, there may be opportunities for you if you have tax deductions. The GIS clawback tax is based on family net income, which is after tax deductions.
For example, here is an easy way for you to make a 30% profit. You and your husband could each contribute $12,150 every year to an RRSP (if you have room) to offset the CPP. That would give each of you the maximum GIS. When you are 72 and withdrawing from your RRIFs, you would be in the lowest tax bracket.
This is worth doing for you, even if you have to borrow the money for the RRSP contributions. You get 50% of the contributions back (possibly plus a bit of income tax you might pay), but then you only pay 20% tax on regular withdrawals on it after age 71.
If you and your husband have $100,000 in unused RRSP room together, you gain $30,000 from this strategy.
Ed
Hi Ed,
My husband and I only have CPP and OAS. Without OAS our total benefit from CPP together is $24288.96. I believe the threshold to receive GIS for a couple is $23615.99 therefore we would not be eligible for GIS. Is this correct?
[…] “8-Year GIS Strategy” can mean you have a much more comfortable retirement after age […]
Hi Laura,
Great question. The answer is different for each client.
Your idea is sound. If there is a large capital gain, it may be worthwhile crystallizing it over several years in order to stay in a lower tax bracket. The tax bracket each client is in is usually the most important factor.
You don’t want to do it too soon, though. The goal is to have the book value of investments close to the market value by age 64, in order to minimize capital gains during the 8 years. The investments could grow again after crystallizing. Your client will be in a higher tax bracket during the 8 years than before, no matter how high the tax bracket is.
If the capital gain is too large, you may have to assess whether or not it is worth doing the GIS Strategy. It is $105,000 tax-free, but a huge capital gain years premature certainly reduces the benefit. This is especially true if the circumstances mean they would not get the full GIS anyway. If you get too much in capital gains, dividends and other income and don’t have enough tax deductions to off-set it (such as portfolio manager fees or deferred RRSP deductions), you can lose much of the GIS.
By the way, Laura, I checked out your web site. I have not met anyone yet that is a fee-only financial planner and also knowledgeable about the Smith Manoeuvre. It looks like you have quite a unique and effective service, Laura.
Ed
Hi Jean-Francois,
Many government pensions allow you to “commute” the pension, but some block it once you turn 55.
If you commute at age 63 or sooner, you may be able to do the 8-Year GIS Strategy. In fact, if the non-transferable portion that you take in cash is signficant after tax, it may be able to provide you with the cash flow you need for the 8 years.
“Commuting” your pension means you transfer the amount allowed to a LIRA and take the difference in cash (and pay tax on it). In a normal environment, you could usually transfer it all to a LIRA. With interest rates so low, pension values are quite a bit higher, and the excess amounts often cannot be transferred to a LIRA.
No, you cannot transfer to a LIRA yearly. You can only do it once with each pension.
Ed
HI NBtruck,
Glad you found it helpful. It is a very effective strategy, but only works for some people and requires careful planning and implementation.
Ed
It’s one thing to preach about taking advantage of the government benefits, but GIS is definitely one that is overlooked! Thanks for sharing another intriguing Rempel strategy!
What do you typically advise for age 63 when the capital gains are crystallized? There’s going to be a large tax bill at that point whose payment would surely erode some retirement assets. Is the break-even point a jump to a higher tax bracket?
Can you commute a federal government pension to a LIRA and still execute the strategy? From what I understand, the only option is to cash out your pension in a lump sum . Only a portion of the lump sum can be transferred to a LIRA, and the remainder is taxable income on the year you receive it. Is that a strategy worth considering? As an alternative, is it possible to receive a pension at ages 65-71 but to actually convert it to a LIRA each year? Thank you for your articles. They express novel views and unique strategies.
A very interesting read Ed, thanks for sharing. You have piqued my interest in looking at this strategy more closely as I meet some of the retirement criteria you outlined.