TFSA loophole: How the rich can tap into GIS

TFSA loophole: How the rich can tap into GIS

With a TFSA, well-off Canadians can now take advantage of retirement benefits intended for seniors living in poverty

Sebastien Thi

Sebastien Thibault

The idea that rich retirees can tap into the Guaranteed Income Supplement (GIS), a government program strictly intended for low-income seniors who already qualify for Old Age Security (OAS), is outrageous—but it’s happening, thanks to a growing clash between the RRSP and the TFSA.

Morneau Shepell actuary Fred Vettese recently detailed a strategy that would allow wealthy Canadians to collect GIS benefits between ages 67 and 70. The key is to postpone income from employer pensions, CPP and RRSP income during that time period. Instead, for those three years, you live on withdrawals from your TFSA. Those withdrawals don’t count as income, and thus don’t generate clawbacks of OAS and GIS. Vettese says all a couple needs to do is build up a joint TFSA worth $320,000 by age 67 to make the strategy work—provided you won’t be receiving any other income from capital gains, rents, employment or pensions between 67 and 70.


The percentage of Old Age Security recipients who qualify for the Guaranteed Income Supplement

The amount of additional income at stake is hardly peanuts, either. In 2014, qualifying senior couples could receive $25,360 annually in combined OAS and GIS benefits (mostly tax-free, since GIS is not taxable). Singles could get up to $15,730. Higher-income earners, of course, aren’t supposed to be able to receive GIS at all because the benefit is clawed back if your income only makes you eligible for a small amount of OAS.

Malcolm Hamilton, a senior fellow at the C.D. Howe Institute, praised Vettese’s “example of how fractured and incoherent our retirement system has become.” He says TFSAs are on a “collision course” with GIS, and that Ottawa now worries about the cost of paying benefits intended for seniors living in poverty to wealthy couples who save for retirement using TFSAs instead of RRSPs.

Hamilton points out that for Canadians with below-average incomes, TFSAs are genuinely a better choice than RRSPs. The problem is when wealthy Canadians opt for TFSAs over RRSPs, which until now, provided an “effective way for governments to make sure middle-income Canadians are denied GIS and other income-tested benefits.”