Q: I retired recently, having just turned 65 years of age. I have not applied for CPP or OAS as yet because I had sufficient income in 2016 and did not need the additional income.
I do not have a private pension, but I do have the ability to draw dividends from a holding company which I own.
I do not need CPP or OAS at this time and I am able to live comfortably on what I draw from my holding company.
At what point would it be considered advisable to apply for OAS and CPP?
A: Government pension planning is an important part of retirement planning for everyone, but particularly business owners. There are considerations that apply during the accumulation and the decumulation phases.
In the accumulation phase, Canadians with a corporation need to be drawing sufficient salary to contribute to and increase entitlement to the Canada Pension Plan (CPP) retirement pension. In 2017, the year’s maximum pension earnings (YMPE) limit is $55,300. So taxpayers need to have $55,300 of salary or self-employment income to make the maximum CPP contribution for the year and earn a full year of CPP pensionable service.
CPP is a pertinent consideration for a business owner when determining whether to take compensation as salary or dividends and to what extent.
In your case, Peter, in retirement, the timing decision of CPP, Old Age Security (OAS), corporate dividends and RRSP/RRIF withdrawals is important. To the extent you defer your government pensions, the amount you are entitled to will increase.
CPP increases by 0.7% per month or 8.4% per year that you delay drawing the pension after the age of 65. OAS receives a lesser, albeit still generous increase of 0.6% per month or 7.2% per year that you delay past 65. You can delay both pensions as late as age 70.
To the extent you have an eligible spouse, Peter, you can also consider splitting your respective CPP pensions – so-called CPP pension sharing – by filing an application. A pension sharing application may be beneficial if your income will be higher than your spouse’s income in retirement and if your CPP is also likely to be higher. Pension sharing results in CPP pension earned while living together during your joint contributory period being split equally between you. Since CPP is not eligible for retroactive pension income splitting on your tax return like other forms of eligible pension income, pension sharing is something to consider proactively when applying for your pension.
You commented, Peter, that you haven’t needed CPP or OAS yet, which is great. There are a few considerations related to this I want to touch on below.
Deferring CPP and OAS can be financially beneficial in some circumstances. But the big benefit in your case is to increase your defined benefit (DB) pension income. You may not have a private pension, but CPP and OAS are defined benefit pensions – albeit from the government instead of a private employer. To the extent you defer them, you increase your inflation-adjusted income that will continue as long as you’re alive. So deferring these pensions could be considered a risk mitigation tool to protect you in the event you live a long life.
It also mitigates risk by requiring you to draw down more quickly in the early years of retirement on your risky assets – your investments. Stock markets have performed well in recent years, so it may not be a bad time to draw down on your investments for up to the next five years before starting your CPP and OAS at 70.
Consider drawing down on your RRSP/RRIF assets in the coming years, even if you have non-registered savings, Peter. There are a few reasons:
- RRIF income after the age of 65 is eligible for pension income splitting with your spouse.
- Up to $2,000 of annual RRIF income after the age of 65 is eligible for the pension income tax credit.
- Your RRIF has required withdrawals after age 71, but your corporate assets do not have required withdrawals. So draw down on the inflexible assets first, preserving your flexible assets.
- I like to see retirees attempt to smooth their income, paying as little tax over their entire retirement, rather than just in the first few years. Some people have little to no income in their late 60s and then their income skyrockets at 72 if they defer their RRIF. I’d rather see modest RRIF withdrawals in your 60s if you’re retired, to avoid jumping into a higher tax bracket in your 70s or 80s.
- Drawing down on your RRIF before you start your OAS pension may help you to avoid OAS clawback. It may not be an issue depending on your expected income in retirement, Peter, but OAS clawback reduces your OAS pension by 15% of every dollar your net income on line 236 of your tax return exceeds $74,789 in 2017.
Preserving your corporate assets will give you a lot of flexibility, Peter. I like corporations because you can use them to invest in things beyond what you can buy in an RRSP, like a rental property or another business. Corporations also give you more flexibility in the long run for income splitting, an estate freeze, etc. that go beyond the scope of this article.
In short, Peter, I think deferring CPP and OAS could be worth considering for you. But business owners have even more complexity than the average Canadian in determining how to accumulate and decumulate assets. Don’t just opt for the easiest or lowest tax solution today. Plan for the long run.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.