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.
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
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.
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.
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?
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
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 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 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?
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
“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.
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.
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
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