The idea of “rich” older Canadians tapping into the Guaranteed Income Supplement (GIS) was floated in an intriguing article in the Financial Post last week by Morneau Shepell chief actuary Fred Vettese. Considering that GIS is sometimes described as “Senior’s Welfare,” it’s little wonder the article drew more than 70 reader comments.
Some argued about the morality of the gambit, but when I interviewed Vettese this week, he said most of his emails were from readers wanting to know more about how to take advantage of it for themselves. As he observes, there’s nothing illegal about it. It’s just another way to navigate a complex system of tax rules and investment vehicles in order to maximize income.
The key is to take advantage of the Tax Free Savings Account (TFSA) while deferring taking CPP benefits until 70; you also have to delay withdrawing money from RRSPs and not convert them to a Registered Retirement Income Fund (RRIF) until age 71. In order to get GIS, you have to be receiving OAS: fortunately, while most other sources of income result in GIS benefits being clawed back, OAS income does not have that effect. The earliest that older folk can start receiving OAS benefits is age 65, but for the younger people Vettese addressed in his example, it will be age 67.
As I remarked last week at my own site, and as Fred admitted, neither of us had encountered this strategy before. Normally, higher-income Canadians don’t even think of GIS because benefits are clawed back at much lower income levels than OAS. (The truly rich are resigned to losing both.)
A big benefit of TFSAs is that when you pull money out, not only is it tax-free but it doesn’t result in clawbacks of either OAS or GIS. Vettese described a couple now age 40 who plan to retire at 67. Assuming maximum contributions and normal investment returns, their TFSAs would be worth $320,000 by then: they would withdraw $36,000 each year from their TFSAs between age 67 and 70. That would involve drawing down on capital since he’s not counting on the implied return of almost 10%.
But that’s not a problem because you can always recontribute to TFSAs later. They’d also get $23,000 a year from OAS (between them) and Vettese suggests it may be possible for them to get a maximum (and tax-free) GIS payment of $21,000 each of those years. That’s despite the combination of their paid-for home and RRSP and TFSA balances making them technically millionaires. They would stop receiving GIS at age 70, but by then their RRSP balances will have grown and their CPP benefits would be almost twice as much as if they had started to take early CPP in their early 60s.
Vettese suggests it may even be possible to expand the window for this strategy to five years instead of three: if the government ever changes the rules to permit delaying the onset of CPP benefits to age 72 instead of 70 (and possibly the same for the RRIF conversion age). Also, the “opportunity” might be greater still if Ottawa balances its books and makes good on an earlier Conservative promise to raise annual TFSA contribution limits from the current $5,500 to $10,000 per person.
The GIS strategy could work even without maximum TFSAs. Vettese says those with non-registered investment accounts held in low-interest-bearing fixed-income investments might be able to draw down principal of $40,000 a year from such accounts for three to five years. The minuscule interest income would scarcely affect their GIS qualification. (If held in Canadian dividends, the “gross-up” rules at tax time would probably have a bigger impact on OAS and GIS than interest income in this example.)
Retired actuary Malcolm Hamilton says while Vettese’s original article used the word “rich” in the headline, a dual-income Toronto couple making $160,000 a year is not much above average. “To fully implement the strategy you need to get your family taxable income down to zero for three straight years: no interest, capital gains, rents, employment income (even deferred payments from earlier periods of employment), pensions (other than OAS and GIS), etc. Also, I think there may be a lag in the income test, i.e. the GIS benefit you collect today may be based on your income 12 to 18 months months ago.”
But he praised Vettese for providing “a concrete example of just how fractured and incoherent our retirement system has become. Governments keep adding program after program, each piled absurdly one on top of another, until eventually only a genius can figure out how to navigate the retirement system.”
Hamilton, who is also a senior fellow for the C.D. Howe Institute, says he fears the TFSA and the GIS clawback are on a collision course. “Governments are now concerned about the cost implications of paying GIS benefits to middle-class Canadians who substitute TFSAs for RRSPs.”
That’s why governments are still trying to “force or coerce” Canadians with below-average incomes to save in RRSPs (as required by PRPPs) or through registered pension plans like the new Ontario Registered Pension Plan or the proposed expanded CPP. “None of these are effective ways for Canadians with below-average incomes to save for retirement,” Hamilton says, “However they are effective ways for governments to make sure that middle income Canadians are denied GIS and other income-tested benefits, and this appears to be the dominant motivation.”
Morality aside, now that this strategy is out there in the press, I wouldn’t be counting on this loophole–if loophole it is–lasting too long. There are close to 10 million Canadians now in TFSAs and as six-figure TFSAs become more common, I wouldn’t be surprised if Ottawa changes the rules in mid-stream.
Jonathan Chevreau is the Editor-at-Large of MoneySense and the Chief Findependence Officer at financialindependencehub.com.