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Taxation Seminar for seniorsHosted by McGill University
Retiree Association (MURA)
AMÉLIE CAMPEAU-LANCTÔT Lawyer, LL.B. LL.M. Tax
VP Tax and Estate Planning
MARIE-LUISA DE BENEDICTISB.A.A. Pl. Fin.
Financial Planner
October 24, 2019
Presentation plan
1. Key strategies to reduce your tax burden during retirement• Old Age Security Pension (OAS) Clawback how does it work
• Strategies to consider to reduce your income tax bill now and in the future
• Helping fund grandchildren education
2. Estate planning : will, mandate in case of incapacity, power of attorney• Respecting wishes and goals
• As effectively as possible: facilitating the transfer of the estate
• In the most optimal way: tax bill for the estate
• The will is the end of the process
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FINANCIAL PLANNINGKey strategies to reduce your tax burden
during retirement
Old Age Security Pension (OAS)
• Maximum payable amount at age 65 : $7,362 per year in 2019
• Maximum payable amount at age 70 : $10,013 per year in 2019
(increased by 0.60% per month/delayed maximum 36%)
• OAS Clawback applies if your net income before adjustments on line 234 of your tax return is greater than $77,580 in 2019 :
➢ For every dollar of income over the threshold, 15% of OAS is clawed back
➢ Full repayment if income is over $126,058 in 2019
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Old Age Security Pension (OAS)
What common types of income are included in your net income before adjustments?
➢Employment income
➢Self-employment income
➢OAS pension
➢QPP benefits
➢Pension income (including McGill Group LIF, RRIF payments, LIF payments, Life annuity payments)
➢Investment income:
• Taxable amount of dividends (gross up amount)
• Interest
• Taxable capital gains
➢Net Rental income
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Key strategies to reduce your tax burden during retirement
Work with your investment advisor to properly structure your investment portfolio to reduce your taxable investment income.
• Whenever possible, place those assets that have a tax preference in non-registered portfolios – for example capital gains.
• Whenever possible, place interest producing assets in registered portfolios.
• Non-registered prescribed annuity.
Reduce personal income taxes through income splitting strategies :
• Pension Income Splitting
• Sharing your retirement pension under the Québec Pension Plan (QPP)
• Tax-Free Savings Account (TFSA)
• Spousal loan
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Income splitting
What does income splitting mean?
The ability to use the lower tax rates of other family members to decrease the aggregate tax bill of your family.
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Pension income splitting
What does Pension income splitting mean?Current rules allow you to share up to 50% of certain types of qualified pension income with your spouse or common law partner for tax purposes.
What types of pension income are eligible for individuals who are 65 years of age or older?
• RPP (registered pension plans) life annuity payments and DPSP
(deferred profit-sharing plans) benefits;
• RRIF payments;
• LIF payments (including McGill Group LIF payments);
• Life annuities from an RRSP (excluding simple RRSP withdrawals);
• Certain retirement compensation arrangement income;
• Certain PRPP (pooled registered pension plans) or VRSP (voluntary retirement savings plan) benefits.
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Pension income splitting
What types of pension income are eligible for individuals who are under 65 years of age1, for federal purpose only?
• RPP (registered pension plans) life annuity payments as well as certain other payments received following the death of a spouse or common-law partner.
What common types of income are not eligible for pension income splitting?
• payments from the Québec Pension Plan (QPP) or the Canada Pension Plan (CPP)
• Old Age Security payments
• RRSP withdrawals (other than an annuity)
1In Quebec, an individual may not split any retirement income before 65 years of age.
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Pension income splitting
What are the advantages of splitting pension income?• Reduce income taxes if you can move income from a higher income
earner to a lower income earner;
• It can be used to give access to the Pension Income Tax Credit;
• Reinstate Old Age Security benefits by reducing or eliminating repayment (clawback);
• Reinstate Age Amount Credit by reducing or eliminating repayment (clawback).
How does pension income sharing work?• No funds are transferred, the split occurs only on paper when filling your
income tax return.
• An annual election must be made by both spouses.
• Different amounts can be allocated for Quebec purposes than for Federal purposes.
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QPP retirement pension sharing between spouses
What does QPP retirement pension sharing mean?
• Pension sharing is a temporary sharing of QPP retirement pension
benefits between spouses in an ongoing relationship.
• QPP Sharing is sometimes referred to as QPP Splitting.
What is the purpose of QPP retirement pension sharing?
The main purpose of pension sharing under the QPP is tax savings. QPP
pension sharing is a form of income splitting. Pension sharing produces a
tax saving if one spouse is receiving more QPP and is in a higher tax
bracket than the other spouse.
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QPP retirement pension sharing between spouses
How does QPP retirement pension sharing work?
• Both spouses do not need to have contributed to the Québec Pension Plan to share the retirement pension of either one of them, but they must both be at least 60 years of age.
• If the two spouses contributed to the Plan, both must be receiving their retirement pensions before their pensions can be shared.
• Once a decision has been made, the two spouses will receive a letter indicating the amount of their new pensions.
• Retirement pension sharing is not necessarily fifty-fifty but is based on the period of cohabitation. Pension sharing is also possible for common law partners or same-sex partners.
How to apply for QPP retirement pension sharing?
• To benefit from this option, you must file an application with RetraiteQuébec. To file your application, download the Application for Retirement Pension Sharing Between Spouses form on their website.
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Tax-Free Savings Account (TFSA)
• Maximize your TFSA
Each year, new contribution room for the Tax-Free Savings Account (TFSA) is opened. The annual TFSA dollar limit for the year 2019 is $6,000. The accumulated TFSA contribution room since 2009 is $63,500.
• Help your spouse maximize their TFSA
Ordinarily gifts between spouses for investment purposes are subject to complex tax attribution rules; however, spouses can gift funds to each other for the purpose of TFSA contributions.
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Tax-Free Savings Account (TFSA)
What are the advantages of the TFSA?
• The income generated in your TFSA is not taxable. You therefore save on
taxes and can accumulate more money than if you invest outside a
registered account.
• Money can be withdrawn from the TFSA and then put back the following
year (in addition to the maximum amount allowed for the year).
• Withdrawals made from the TFSA are not taxable (whether it’s your
contribution amounts or the investment income).
How to find out your available contribution room?• By calling CRA at 1-800-267-6999 or visit «Your Account» on the CRA
website.
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Spousal loan
How does spousal loan work?
• If you have large non-registered investment accounts, you can lend funds to your spouse so that more investment income is taxed in your spouse’s hands. This can be effective if your spouse is in a lower tax bracket than you.
• The loan must be carefully structured to ensure the transfer of funds can be tracked.
• The Canada Revenue Agency’s (CRA) prescribed interest rate is currently at 2%.
• The interest must be charged to and paid by your spouse annually.
What are the advantages of a Spousal loan?• Reduce tax • Increase your net worth
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Registered Education Savings Plan (RESP)
A RESP allows for tax deferred growth of investments in the plan. When the income in the account is withdrawn to fund qualified postsecondary education, the withdrawals are taxable to the RESP beneficiary, who is usually in a lower tax bracket than the subscriber. The subscriber can withdraw, under certain conditions, the original capital with no tax consequences.
Who can invest in a RESP?• Parents who want to prepare for rising education costs and save for their
child’s education.
• Grandparents – RESPs are an effective way to pass down money to grandchildren to use for education costs.
• Anyone (friends, aunts, uncles, cousins) who wants to support the education of a child that is dear to them.
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Registered Education Savings Plan (RESP)
The Benefits: Government grants and tax-deferred growth
• The Canada Education Savings Grant (CESG) : provides an annual government grant equal to 20% of the first $2,500 contributed to the RESP up to $500 annually. The maximum lifetime CESG grant per child is $7,200.
• The maximum CESG payable in any one year is $1,000 per beneficiary. So, a $5,000 annual contribution is required to reach the annual grant limit and gives an opportunity to catch up on unused grant room.
• The Quebec Education Savings Incentive (QESI) provides a grant of 10% of the first $2,500 contributed to the RESP up to a maximum of $250 per year. The lifetime QESI grant is capped at $3,600 per child.
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Registered Education Savings Plan (RESP)
The Benefits: Government grants and tax-deferred growth
• Investors can choose between an individual or family RESP.
• Family RESPs offer the flexibility to share a grant and income with beneficiaries.
• Although contributions are not tax-deductible, both personal contributions and grant contributions grow tax-free.
• There are no annual contribution limits. The maximum lifetime contribution per beneficiary is $50,000.
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Registered Education Savings Plan (RESP)
Who should be the subscriber of the RESP?
• We usually recommend that the parents of the children be the subscribers of the RESP.
• Grandparents would then gift money to the parents, who can make the RESP contributions for their children.
What are the advantages of the parents of the children being the subscribers?
• Facilitate the tracking of contributions made every year in the RESP by all family members.
• The subscriber may transfer up to $50,000 of the investment income earned in the RESP into their RRSP if the beneficiary decides not to pursue post-secondary studies.
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ESTATE PLANNING
Taxation at death, will, mandate in case of incapacity, power of attorney
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Take a global approach
1. Financial planning based on the current situation• Current financial obligations (debts. etc.)
• Retirement planning
➢ Retirement goals
➢ Leaving a legacy
• Investment strategies
2. Estate planning: transfer of assets upon death• Respecting wishes and goals
• As effectively as possible: facilitating the transfer of the estate
• In the most optimal way: tax bill for the estate
• The will is the end of the process
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The Will
• It is the end of the estate planning process
• Written with the idea of an immediate death
• Notarized will versus other forms of wills
• Regularly reviewed: major personal or financial event
• Foreign assets: foreign will
• Consistency between spouses' wills
• Discuss the subject while you are alive : talk about it with the key people
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Taxation at death
• Automatic rollover to the surviving spouse at death
• Legacy to other people than the surviving spouse : deemed disposition at fair market value = taxes to pay by the estate
• Donate while I am alive or at death only ?➢Retirement projections
➢Tax consequences in both situations
➢Tax rate during retirement vs. tax rate for the estate
➢Facilitate the transfer of the estate
➢No probate fees in Quebec
➢Personal goals and intentions
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Dying without a will
• Dying without a will: help!
➢The Quebec Civil Code will determine who will inherit
➢The common law spouse is not eligible
▪ 100% children
▪ Brothers and sisters ½ and father and mother ½
➢Even if I am married: my spouse does not inherit everything
▪ Married spouse 1/3 and children 2/3
▪ Married spouse 2/3 and father/mother 1/3
➢I cannot choose my liquidator-trustee
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The Will
• Particular legacy➢Rollover of RRSP or TFSA to surviving spouse
➢Registered education savings plan (RESP) : name a replacement subscriber
➢Philanthropy
➢Legacy of a real estate asset to a particular person
➢Legacy of the use of a residence vs. the ownership
➢Legacy of a real estate asset to the spouse if spousal trust
➢Specific cash amount to specific people
• Balance of the assets = universal legacy
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The Will
• LIRA-LIF at death• Priority payment to the surviving spouse, no matter what is in the will
• Provincial Quebec LIRA-LIF
➢ Priority to married spouse or common-law spouse = 3 years living together or 1 year + child
➢ Plan Unlocked for the surviving spouse and can be contributed to a regular RRSP (contribution room is not a factor) or regular RRIF
• Federal LIRA-LIF
➢ Common-law spouse = 1 year living together
• If no surviving spouse : paid to the estate
➢ Taxes to pay and plan unlocked for the beneficiaries
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The Will
• Legacy to minor children➢Public curator if the legacy is more than $25,000: how to avoid this
➢Prolonged administration clause or testamentary trust
• Reconstituted or blended families – second marriage➢Equity between heirs: legacy to spouse without tax and legacy to
children with tax payable
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The Will
• Protecting Vulnerable Heirs: testamentary trusts➢Minor children
➢Inability to manage assets
➢Adults who have not reached age of majority
➢Dependency problems
➢Vulnerable economic situation
➢People vulnerable to financial abuse
➢In-laws
➢Preserving inheritance for children –surviving spouse ends up in a new relationship
➢Preserving inheritance for grandchildren
➢Protection against creditors
➢Trusts for people with disabilities
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The Will
• Choice of Liquidators and Trustees ➢How many people should I appoint?
➢The age of the liquidator(s)
➢Good relationship with all family members
➢The case of reconstituted or blended families
➢Canadian residents (taxes and proximity)
➢Third-party (professional or trustee)
➢Talk about it with the people that you chose
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Beyond the Will
1. Deed of trust
2. Life insurance policies
3. Marriage contracta) Family patrimony: RRSPs, residences, cars, QPPb) Matrimonial regime: partnership of acquests or separation as to
propertyc) The survival of the maintenance obligationd) Divorce (vs. separation)e) The case of de facto spouses: Common Law Agreement
4. Mandate in case of incapacity
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Mandate in case of incapacity
• Document that allows you to name a person who:➢ will administer your assets during incapacity➢ will see to your well-being during incapacity
• Don’t wait before it’s too late to sign these documents
• Talk about it with your family members
• The difference with the will:➢Incapacity/still alive/no death
• What happens if I have not signed a mandate?➢Those around you will have to address the court so that it opens a
protective supervision in your favor. The court will appoint a curator to ensure your well-being and administer your property
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Property Mandatary
• Manages the property, debts and other financial interests of the incapacitated person
➢Administers the income of the incapacitated person (retirement pension, disability pension)
➢Pays bills (accommodation, electricity costs, taxes, credit cards)
➢Manages assets, i.e., invests, renovates or sells a property
➢Recovers, in the name of the incapacitated person, any sum due to him-her;
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Individual Representative
• Role of ensuring the physical and moral well-being of the incapacitated person
➢Makes decisions about the accommodation of the incapacitated person
➢Makes sure needs are met (clothing, food, personal hygiene products)
➢Sees that the person benefits from outings and leisure activities;
➢Provides consent with regards to health care (within the limits of the law, because the incapacitated person retains a certain autonomy in this matter)
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Mandate in case of incapacity
• Complete, precise document (notary, lawyer)
• Clear guidelines (avoids conflicts)
• Probated mandate➢Medical evaluation
➢Judge must establish incapacity
• Mandate vs. power of attorney
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Power of Attorney
• Also called "procuration"
• Don’t wait before it’s too late to sign these documents
• Allows you to designate someone to act on your behalf and in your name, but when you are still able to do so
• 1) Bank power of attorney
2) Specific power of attorney
3) General power of attorney
• Our recommendation: limit powers
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Power of Attorney
• The difference with the mandate in case of incapacity:
➢The mandate in case of incapacity applies only from the moment the court declares you incapacitated
➢Power of attorney stops being valid at the time the court declares you incapacitated
• Why both documents are useful
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Thank you !
PETER GUIDOTECFP, CPA, CA, CIMA®, FCSI, CIM, AIF™Director Wealth Management, Investment Advisor & Portfolio ManagerGuidote Wealth Stewardship – Richardson [email protected]
AMÉLIE CAMPEAU-LANCTÔTLawyer, LL.B. LL.M. TaxVP Tax and Estate Planning - Richardson [email protected]
MARIE-LUISA DE BENEDICTISB.A.A. Pl. Fin.Financial Planner - Richardson [email protected]
