Welcome to Episode 33 of Retire Me!
This week, we are talking about taxes. I talk about some recent research and a video from Jamie Golombek from CIBC discussing the impact of this year's government spending and how the government may raise taxes to pay for the additional debt.
From there, I talk about how a prospective or current retiree might be impacted by those changes.
From there, I talk about some year-end tax tips for retirees.
Higher income taxes
• Canada already has very high personal income tax rates comparatively.
○ The top 1% of Canadian income taxpayers pays almost a quarter of total income taxes in Canada.
○ We are top 10% in the world in terms of personal tax rates.
• Principal Residence - it would be very tough to administer, would need to be done prospectively valuations would be a bit messy
• Wealth tax - politically quite popular to talk about - hard to administer, double taxation, how do you administer it? In 1990, there were 12 countries who had a wealth tax, now only 4 do. $3,000,000 * 0.02%
• Capital gains inclusion rate, possibly yes - capital gains tax paid mostly by upper income Canadians, it was 75% up until 2000, not it's 50% inclusion rate
Increased Consumption Taxes
• Increase in consumption taxes, possibly yes - GST increase by 2%, and add in a higher low-income GST credit to offset
How would increased GST, increase in Capital Gains Taxes, and Inclusion of Principal Residence taxes impact retirees?
1) GST - slightly higher cost for some of the things you buy.
a. Groceries, prescription drugs, health/dental/medical services - all exempt)
2) Capital Gains Inclusion rate - likely not to have a huge impact on many retirees
a. Would not apply to:
i. RRSP's, RRIF's, OAS/CPP, Pension - taxed as income
ii. TFSA's - tax-sheltered
b. Would apply to:
i. Non-registered accounts
ii. Sale of business assets, properties (cottage/investment properties)
3) Principal Residence Capital Gains
a. Would not apply to a retiree who stays in their house until they pass away
b. Would apply to retiree who wants to downsize
i. Emphasize this would likely to be prospective, if at all
ii. Ie. If the house was bought for $500k, it's worth $1,000,000 today, you sell it in 10 years for $1,300,000, the capital gain inclusion on that house would just be the growth between $1,000,000 and $1,300,000
c. Again, this would be very unpopular, so don't worry too much just yet
Personal tax increases - what's on the table?
Year End Tax Tips
1) TFSA's - new TFSA room announced will be $6,000 in 2021
a. if you are planning a short-term withdrawal from your TFSA in early 2021, consider making it in December.
b. TFSA room is recalculated every January
c. The amount of room you have is calculated as:
i. Previous unused room
ii. Plus previous year's withdrawals
iii. Plus new contribution room
d. Better to make that withdrawal in 2020 and have the room refresh in a couple of weeks vs. Having to wait a whole year
2) RRIF's - note that if you turned 71 years old this year you need to convert your RRSP to a RRIF by December 31, 2020
a. Tax moves:
i. You can base the withdrawals off of your spouse's age (ie. 71 - 5.28%, 65 - 4%)
ii. You can contribute to a spousal RRSP and get a tax refund
iii. You can split up to 50% of your RRIF income with your spouse
3) RESP's - if your child turned 17 this year, this is the last year that your contributions will attract Canada Education Savings Grants
i. $50,000 lifetime limit per beneficiary
ii. $7,200 lifetime CESG limit
iii. No CESG paid once child turns 18
iv. You can catch up 1 year of CESG at a time
v. $2500 contribution attracts $500 grant * 2 = 2 $5,000 contribution to get $1000 of CESG
vi. The RESP will need to have been opened an account and contributed $2000 before the child turned 15
Disclaimer - This podcast is for informational purposes only. Please consult with a financial advisor familiar with your unique financial situation before making any decisions. Nothing in this broadcast constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Mark Walhout is the owner and lead financial advisor at Walhout Financial and an Investment Fund Representative at Investia Financial Services Inc.