Category Archives: Tax

Early Retirement and Taxes

Well dear Canadians, please tell me you have finished your income tax submission and submitted them (and if you owe paid up)? If not just a reminder that they are due tomorrow on April 30, 2019.

I fully admit I ended up procrastinating on doing my income tax this year as I really don’t like the pain of having to gather and calculate everything for two home based businesses and investments.  It typically ends up taking me like four or five hours to do all of it.  But I eventually got it completed and it went partly as expected and partly had a few surprises for me.

First off I more or less expected that all the money I paid in withholding tax on my RRSP withdrawal last year ended up be refunded.  This occurred since my taxable income was under the basic deduction therefore I pay zero income tax on the withdrawal (at least eventually…as you can’t get around the withholding tax when you initially take the money out).  Also, as per normal, my wife actually didn’t pay income tax but she did owe money for her Canada Pension Plan (CPP) contribution (~$300) on her business income  (I didn’t owe any CPP as I actually had a loss in my business for 2018).  Thus we did achieve one objective I had from my early retirement plan to keep our income tax bill as low as possible (in 2018 it was actually zero).

Newer readers might be a bit confused on how it is possible to have taxable income of around $19K but actually spend about $35K per year so let me explain.  Any withdrawals from our TFSA accounts are tax free thus don’t increase our taxable income.  Also any dividends my wife receives in her taxable account also end up being not added to our taxable income as the tax credit gets is greater than the taxes owing on that income.  So that ends adding $10K a year to our income but it doesn’t show up as taxable income.  Then finally we used some savings and last year’s tax refund to bridge the rest of the spending.

Then of course as I previously had touched on our Child Tax Benefit is going to go up considerably as of mid 2019 since our taxable income in 2018 was so low.  In the end it ends up being close to $933 per month starting in July, which should give our investments some time to grow for the next couple of years while we qualify for that benefit.  An important note about this additional income it is a tax free benefit.

Finally, there were a few surprises for me while filing our taxes.  First up was the fact we would qualify for a GST Credit benefit as I haven’t gotten that credit in likely close to two decades as I earned too much to qualify for it.  So that will give us a quarterly payment of just over two hundred dollars which will be a nice bonus.  The second surprise was the Working Income Tax benefit, which I basically forgot even existed since I was never closed to qualifying for it until now.  It is benefit meant to encourage low income people to work and you need a family income of at least $3000 and it should give us a few hundred dollars of extra income per quarter.

While I’m still waiting for my assessment to be completed and sent back I am projected to get around $2600 of a refund back.  So overall it is a bit higher than I expected but not huge amount like last year when I was using up as much RRSP contribution room as possible prior to leaving work in 2017.

So how did you taxes go this year?  Did you learn anything new?

Year End Financial Cleaning

Well with the Christmas over you might be focused on cleaning up the cardboard and packing up the tree before getting ready for the New Year’s fireworks. Yet this is also a good time of year to get some financial items in order before the New Year hits. The good news is many of these items only take a few minutes to take care of.

For retirees like myself you should consider pulling money from your RRSP and/or your TFSA for living expenses for next year. Why now? Well with the TFSA if you pull the money out now you regenerate the contribution room on January 1. Which may come in handy if you want to shift money around and maximize your TFSA to reduce your long term tax burden. After all, why keep money in a taxable account when you have contribution room in an TFSA?  I would rather pay a small capital gain now and reduce the long term tax liability.

As to the RRSP, the fun part of those funds is if you have no other income for the year you can pull money out of it up to your basic income tax deduction and pay zero tax (the exact number can vary by province but generally you are safe around the federal deduction limit of $11,809 for 2018). The key point here is you eventually get your money back.  You still have to pay the withholding “tax” when the money comes out but you get it back when you file your taxes next spring (it really isn’t a tax but rather an bulk estimate of income tax that is automatically deducted when you take the money out).

I already did both of those items. I pulled the cash sitting in our TFSA accounts out last month and then this month I pulled just under $7000 out of my RRSP.   Which honestly felt more scary than it was…why?  Because I pulled the money from the bond portion of my RRSP.  That way I can ignore the noise of the stock markets which seem to acting closer to a yo-yo than anything else lately.

Finally, you might also plan to sell some of your investments, which I know sounds nuts given my last statement but there are situations where that is a good idea.  For example, you might purposely sell off that dead end individual stock you own and that is worth a faction of its worth to create a tax loss which can be used to offset some capital gains from those investments that did turn out and you are getting out of.  I’m personally not in this situation but it can be useful at times.

Finally, you likely want to gather any copies of tax documents you might need to get a jump on your taxes.  So that might mean updating your accounting records for your small business or/and downloading digital copies of bills if you use your home for your business.  Often this can be done fairly quickly and make the tax season a bit easier.

So what do you for a year end financial clean up?

Tax, We Pay No Stinking Tax

Of course the title of this post is misleading…of course I pay some tax right now…actually a LOT of tax when you get right down to it. Overall the number shifts around but in the end we pay about 20% income tax after using ever tax credit and deduction we can claim (based on total income for my wife and I – mine being almost all the taxes paid). So when it comes to retirement planning reducing your tax bill can go a very long way to shortening your retirement savings goals.  After all if you pay less tax in retirement you need to save less in advance to retire in the first place.  So how on earth do you keep your tax rate in retirement hovering around zero?  Well that are a few different ways to get close to zero in Canada, but to be honest a zero dollar tax bill is difficult to get down to.

The first one is likely the most straight forward and hard to do depending on your spending. Your basic income tax deduction allows you to pay no tax on the first $11,327 you earn for federal tax  in 2015 (I’m going to assume your provincial rate is equal to or higher than that number for this post, but please do check here).  So a couple can take in $22,654 in wages and/or RRSP withdrawals and pay no tax on it.  So if you are willing to keep to a low spending rate this gets fairly easy to do.  Just a note, yes you will pay a withholding tax on an RRSP withdrawal, but it will be refunded when you file taxes the following year if you stay below this limit. Oh, and please note…I’m not including Canada Pension Plan (CPP) deductions in this post since in my mind it isn’t a tax but rather a pension contribution.

Of course, even my spending budget is more than $22,654 so get more money out tax free you next stop will likely be the TFSA.  After all this account rocks, you put in after tax money and any growth you take out is tax free.  Nice deal, especially for young people who can potentially mainly skip the RRSP and put everything for their retirement dollars in this account.  Obviously the draw back here is for older folk who don’t have much savings in these accounts.  In our case, my wife and I plan to take out about $6000/year from these accounts during our retirement years.  So adding that to the basic deduction amount I can pull out $28,654/year tax free.

Yet that is still slightly short of our target spending of $30,000/year.  So am I out of tricks? Of course not, the last particular trick lies in the fact for lower income earners that you can often get dividend income completely tax free.  For example, if you clicked on that previous link and checked out Saskatchewan’s marginal tax rates you would have noticed for 2015 the tax rate for eligible dividend income is actually -0.03% for up to $44,028. Yes, the tax credit is actually worth just slightly more than the amount you get (hence the negative rate), so it is possible to get some eligible dividend income tax free.  The key here is to know what your particular province allows you to do.  For example, Ontario is even richer on the tax credit so while the limit is a bit lower at $40,922 but has a rate of -6.86%.  Nice eh?  Of course the downside is during your working career you will pay more taxes on this dividend income, but once you drop your income down in retirement you should be paying less.

Now the fine print…this works well in broad theory, but if you play a tax calculator (like these) you might find it doesn’t work out just perfectly.  After all if you have some working income during your semi-retirement years you may end up paying some Employment Insurance premiums and CPP contributions.  This also tends to break down when you get higher income levels.  So once you push past that eligible dividend limit you start paying more taxes.  Sorry, that are limits on how well you can play this game.

So have you tested your income plan to see how much tax you will be paying in retirement yet?  If not, I would suggest giving it a try.  It can be educational.  Or if you are retired how low did you get for your income tax bill?