FIGURING OUT WHETHER YOU CAN AFFORD TO RETIRE NOW (OCTOBER 2020)
The year 2020 has been one of significant personal and economic dislocation for Canadians. The ongoing pandemic and the resulting impact to everyone's way of life has led many to reassess their current circumstances and, often, to make changes. For older Canadians, one of those changes is likely to be consideration of whether it makes sense to accelerate retirement plans. Like the rest of the workforce, many older Canadians have lost jobs or faced reduced hours — and, therefore, reduced income — as a result of the pandemic. Older Canadians have reason to feel particularly vulnerable to the risk of falling seriously ill during the pandemic, and many of those who are nearing retirement are likely considering, as the pandemic continues with no certain end in sight, whether it makes sense to return to full-time work (if and when that work becomes available again) and continue to incur such risks.
Of course, wanting to accelerate one's retirement date and being financially able to do so aren't the same thing. Therefore, the first task faced by anyone contemplating retirement in the very near future is to determine what financial resources they will have to live on, and whether those resources are sufficient.
For most Canadians, income in retirement will come from three sources. The first two sources — a Canada Pension Plan retirement pension and Old Age Security benefits — will be received by nearly all retirees. The fortunate minority who are members of an employer-sponsored registered pension plan will also receive a monthly benefit from that plan. For the majority of Canadian retirees who will not receive a pension from their employer, the balance of their income in retirement (after CPP and OAS) will come from private retirement savings accumulated in registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs). The real question for most Canadians is how to determine the amount of annual income which all those sources of income will generate during their retirement years, and that's not a simple calculation.
Money can be withdrawn from an RRSP or TFSA at any age, a CPP retirement pension can start anytime from age 60 to age 70, and Old Age Security benefits can be received as early as age 65 or as late as age 70. For both CPP and OAS, benefits will rise with each month that receipt of such benefits is deferred. As well, income from the different types of retirement income may be subject to different tax treatment, meaning that the after-tax amount received on $100 of income may vary widely, depending on the nature and source of that income.
The number of factors to consider and, especially, the complexity which results from the interaction of those factors could reasonably lead the average Canadian to conclude that it's just not possible to make an accurate determination of the best way to structure their income in retirement, in order to ensure a reasonable income throughout their retirement years. But help is at hand — and it's free!
That help is in the form of a Retirement Income Calculator which is available on the Government of Canada website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html.
Using that calculator, individual Canadian taxpayers can enter their personal data, including their date of birth, gender, and planned age of retirement, without the need to provide any personal identifying information. The user is then asked to provide information on income amounts which will be received from various sources, including any employer pension and Canada Pension Plan amounts and the age at which the user plans to begin receiving such income. Information is requested on the user's period of residency in Canada, in order to determine whether he or she will be eligible to receive Old Age Security benefits and the amount of OAS benefits which will be provided at different ages. The calculator also allows the user to input the total amount of savings accumulated to date. Finally, information is requested on any other sources of income which will be available during retirement.
Using that data, the calculator estimates the amount of income which will be available to the individual from each source during each year of his or her retirement and generates a bar graph and a table showing those income amounts.
The real benefit of the calculator, however, lies in the individual's ability to vary the inputs — to create "what-if" scenarios in order to determine the effect any changes made will have on retirement income at various ages. Users can change the age at which they choose to receive government-sponsored retirement benefits like CPP and OAS, or can specify a different rate of return (pre- or post-retirement) earned on retirement savings. They can also change the period of time (i.e., life expectancy) over which retirement income will be spread. That way, the user can obtain answers to frequently asked questions like the following:
How much more will I receive if I accelerate — or delay — receipt of Canada Pension Plan or Old Age Security benefits, or both, for one, two, or more years?
What if I work an additional year or two after age 65 before starting RRSP withdrawals?
What if I earn income from part-time employment during retirement?
What if I choose to begin receiving CPP and OAS as soon as I am eligible, but defer making RRSP withdrawals?
What if I live longer than the average life expectancy?
For each of these what-if fact scenarios, the calculator will determine the effect that particular change will have on the amount of income receivable from each different retirement income source, and will provide a summary of income for each year of retirement from all such sources under each fact scenario created by the user.
There are, of course, some factors which can't be incorporated into any calculator because they cannot be predicted or planned for. No one can predict how long their retirement will last (although the calculator does project retirement income based on average life expectancy for individuals of the age and gender of the user). Similarly, it's never possible to know what investment returns will be earned on retirement savings during retirement, or what the rate of inflation will be. The calculator's ability to estimate future income data based on a number of different fact patterns does, however, allow users to create retirement income projections under both "best-case" and "worst-case" retirement income scenarios. And, based on those income projections, an individual can determine whether retirement in the near future is financially possible.
MAKING A PAYMENT ARRANGEMENT WITH THE CANADA REVENUE AGENCY (OCTOBER 2020)
Each year, the due date for payment of all income tax amounts owed for the previous year falls on April 30. In 2020, however, that payment deadline has been something of a moving target. Earlier this year, the federal government, in recognition of the financial disruption and hardship caused by the pandemic, extended the payment deadline by four months, to September 1, 2020. In mid-September that date was extended again, such that all individual income taxes owed for 2019 were due and payable by Wednesday September 30. There has been no further extension.
Each year, for any number of reasons, there are taxpayers who cannot pay the tax amount they owe by the required deadline. This year, that number is likely to be higher than usual, because many Canadians have suffered a loss in income as the result of the pandemic and, for many, income has not returned to pre-pandemic levels. As well, benefits payable under the federal government's major individual income replacement program — the Canada Emergency Response Benefit — came to an end at roughly the same time that final tax payments were due on September 30.
Where a taxpayer is unable, owing to financial difficulties, to pay their final tax balance as required, the Canada Revenue Agency (CRA) is willing to enter into a payment arrangement. Under such an arrangement, the outstanding amount owed can be paid over time, as the taxpayer's financial circumstances allow.
There are two avenues available to taxpayers who want to avail themselves of such a payment arrangement. The first is a call to the CRA's automated TeleArrangement service at 1-866-256-1147. When making such a call, it is necessary for the taxpayer to provide his or her social insurance number, date of birth, and the amount entered on line 15000 of the last tax return for which the taxpayer received a Notice of Assessment. (For taxpayers who are up to date on their tax filings, that will likely be the Notice of Assessment for the return for the 2018 tax year, or perhaps 2019, depending on when the return for 2019 was filed). The TeleArrangement Service is available Monday to Friday, from 7 a.m. to 10 p.m. EST.
Taxpayers who would rather speak directly to a CRA employee can call the CRA's debt management call centre at 1-888-863-8657, or can complete an online form (available at https://apps.cra-arc.gc.ca/ebci/iesl/showClickToTalkForm.action) requesting a callback from a CRA agent.
The CRA also provides on online tool, in the form of a payment arrangement calculator (available at https://apps.cra-arc.gc.ca/ebci/recc/pac/prot/welcome?request_locale=en_CA), which allows the taxpayer to calculate different payment proposals, depending on his or her circumstances). That calculator includes interest charges since, no matter what payment arrangement is made, the CRA will levy interest charges on any amount of tax owed for the 2019 tax year which is not paid on or before September 30, 2020. Interest charges levied by the CRA tend to add up quickly, for two reasons. First, the interest charged by the CRA on outstanding tax amounts is, by law, higher than current commercial rates. For the fourth quarter of 2020 (October 1 to December 31), that rate is 5%. Second, interest charges levied by the CRA are compounded daily, meaning that each day interest is levied on the previous day's interest charges. It is for these reasons that a taxpayer is, where at all possible, likely better off arranging private borrowing in order to pay any taxes owing by the September 30 deadline.
Taxpayers who are unable to pay their taxes on time are sometimes inclined to simply put off dealing with the problem, but that's not a good strategy. Where amounts are owed, payment has not been made and no payment arrangement has been entered into, the CRA will ultimately commence collection actions. Where a taxpayer has communicated with the CRA with respect to the outstanding debt and reached an agreement on eventual payment, such collection action (and the possible repercussions to the taxpayer's financial standing and credit rating) can be avoided.
GETTING FINANCIAL HELP FOR A FIRST-TIME HOME PURCHASE (OCTOBER 2020)
Notwithstanding the ongoing pandemic, the real estate market in most of Canada continues to thrive and home prices continue to rise. Some of that may be attributable to the fact that, while prices are rising, the cost of financing a home purchase is near historic lows.
Typically, first-time buyers trying to get into the real estate market face two hurdles. The first is the need to put together a sufficient down payment, and the second is their financial ability to meet ongoing mortgage repayment obligations (i.e., the monthly mortgage payment). Increases in the cost of homes in Canada mean that, even at near record low mortgage lending rates, the size of the mortgage (and, therefore, mortgage payment amounts) can be prohibitive.
Adding to that difficulty is the fact that the rules governing mortgage lending practices and mortgage repayment requirements have become increasingly stringent over the past decade. While it was for a brief time possible to purchase a home in Canada without making a down payment, and to stretch the mortgage amortization period (the length of time over which the mortgage is repaid) to 40 years, that is no longer the case. Today, prospective homeowners must provide a down payment of at least 5% of the purchase price of a home, where that purchase price is $500,000 or less. Where the purchase price exceeds $500,000, the required down payment is $25,000, plus 10% of the portion of the purchase price which is over $500,000. And, where the purchase price is $1,000,000 or more (as it could well be in Toronto or Vancouver) the required down payment is 20% of the purchase price, or at least $200,000. In addition, where the down payment amount is less than 20% of the purchase price (which is almost always the case for first-time home buyers) the maximum amortization period for a mortgage is 25 years.
Some prospective home buyers have other sources from which a down payment can be put together — often a loan from family members or even, for a fortunate few, the gift of a down payment from parents or grandparents. For those not in such a position, however, there are a couple of alternatives. The first provides assistance with putting together a down payment, while the second reduces the amount of monthly mortgage payment for first-time buyers.
Home Buyer's Plan
The Home Buyer's Plan, or HBP, allows first-time home buyers to borrow funds, tax and interest free, from their registered retirement savings plan (RRSP) to serve as, or to augment, their down payment.
Under the HBP, a first-time home buyer who has entered into an agreement to purchase or build a home can withdraw up to $35,000 from his or her RRSP to purchase that home. The amount withdrawn is not taxed on withdrawal, as it usually would be, but must be repaid to the RRSP over the subsequent 15 years, with the amount of each annual repayment prescribed by law. Where the first-time home buyer is married, and his or her spouse is also a first-time home buyer, the spouse can also withdraw up to $35,000 from his or her RRSP and both withdrawals can be pooled to come up with a down payment.
The borrower (and his or her spouse, where applicable) must intend to occupy the home as the principal place of residence within one year after its purchase — the HBP is not intended to provide funds to purchase or build rental residential accommodation.
The concept of a "first-time home buyer", while seemingly self-explanatory, is in fact more flexible than it first appears. For purposes of the HBP, a first-time home buyer can actually be someone who has previously owned and lived in a home, as long as that home ownership ended more than four full calendar years prior to the time a withdrawal under the HBP is made. For instance, an individual who wishes to participate in the HBP by making a withdrawal of funds on October 31, 2020, will be considered a first-time home buyer if he or she had not owned and occupied a home after the end of 2015, the four full calendar years being the period between January 1, 2016 and September 30, 2020. Where the prospective homeowner is married (including a common-law partnership), the same requirement applies to the person's spouse.
Whatever the amount withdrawn from the RRSP under the HBP, that amount must be repaid within a maximum of 15 years. The first repayment is required in the second year following the year of withdrawal so, in the case of the example above, where the withdrawal is made in 2020, the first repayment must be made in 2022. Each repayment is generally 1/15th of the amount withdrawn so, a maximum withdrawal of $35,000 would mean an annual repayment amount of $2,333. (Such repayments are, of course, in addition to regular required mortgage payments.)
The taxpayer doesn't have to keep track of where he or she stands with respect to the repayment schedule — each year, a Statement of Account is sent to the taxpayer with his or her Notice of Assessment, after the annual return is filed. That Statement will summarize amounts repaid to date, the current HBP balance and the amount of the next repayment which must be made. Such repayments are made by making a contribution to the taxpayer's RRSP during or within 60 days after the end of the year for which the repayment is due, and designating part or all of that contribution as an HBP repayment on Schedule 7, which is then filed with the tax return for that year. If the taxpayer does not make the repayment when and in the amount required, any outstanding amount is added to income for the year and taxed at the taxpayer's top marginal rate.
Like all investment and tax planning strategies, borrowing money from an RRSP to put together a down payment on a first home has both upsides and downsides. The biggest downside is the permanent loss of investment gains on the money temporarily withdrawn from the RRSP during that period of withdrawal. However, it's also possible that the real estate purchased with the withdrawn funds will enjoy a greater increase in value over that period than would have earned by the funds had they remained in the RRSP. Like all investment and tax planning decisions, it comes down to a personal decision based on one's own circumstances.
The rules governing HBP are detailed and can be complex, and it is important to be aware of the ins and outs of those rules before deciding to commit to the program. More information on the HBP can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan.html.
First-Time Home Buyer Incentive
The second option open to first-time home buyers reduces the amount of monthly mortgage payments which they are required to make, through a kind of shared financing program with the federal government. This program, the First-Time Home Buyer's Incentive (FTHBI), which was introduced by the federal government in the 2019 Budget and became available about a year ago, has two advantages. First, it does not require the prospective home buyer to temporarily deplete RRSP funds (or to even have sufficient funds in an RRSP) and, in addition, does not require any repayment by the homebuyer until the home is sold (or 25 years later, whichever comes first).
Under the FTHBI, a portion of the mortgage principal amount on the purchase of a first home can be financed through a shared equity mortgage with the Canada Mortgage and Housing Corporation (CMHC). Essentially, CMHC will provide partial financing for the home purchase but will not require payments to be made on the financing portion which it provides for the first 25 years of home ownership, or until the house is sold.
That CMHC portion will be 5% for purchases of existing properties and 10% on purchases of newly built homes. An example provided by CMHC illustrates the calculation, as follows.
A borrower purchases a new $400,000 home with a 5% down payment of $20,000, which would mean a mortgage of $380,000. With 10% of financing ($40,000) provided by CMHC, the borrower's total mortgage size would be reduced from $380,000 to $340,000, reducing monthly mortgage costs by as much as $228.
There are, of course, limitations and criteria which apply to those seeking to take advantage of the new program. First, it is available only to those who are first-time home buyers (as defined for purposes of the HBP) and who have total household income of less than $120,000 per year. As well, in order to qualify for the shared equity program, the mortgage amount (including the shared equity portion) cannot be more than four times the purchaser's annual household income. Since the upper income limit to qualify for the program is $120,000, a qualifying mortgage therefore cannot total more than $480,000.
It is important to note, as well, the rules that apply with respect to repayment of the CMHC portion of the mortgage financing amount. That repayment amount is not the original amount advanced, but rather 5% or 10% (depending on the percentage of the purchase price originally advanced by CMHC) of the home's value at the time of repayment. In other words, CMHC, having provided financing for the home purchase, shares proportionately in any increase in the value of the home over the borrowing period.
More detailed information on the First-Time Home Buyer Incentive can be found on the federal government website at https://www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive.
Both the HBP and the FTHBI have the potential to provide first-time home buyers with an entry into the housing market which might otherwise have been out of reach. That said, both programs involve significant long-term financial consequences which should be clearly understood by prospective home buyers before making a commitment to participate in either program.
YEAR-END PLANNING FOR YOUR RRSP AND TFSA (OCTOBER 2020)
Most Canadians know that the deadline for making contributions to one's registered retirement savings plan (RRSP) comes 60 days after the end of the calendar year, around the end of February. There are, however, some circumstances in which an RRSP contribution must be (or should be) made by December 31, in order to achieve the desired tax result.
The rules around TFSAs are more flexible, in that a contribution to a TFSA can be made at any time during the calendar year. Nonetheless, there are advantages which can be obtained by careful timing of TFSA withdrawals and recontributions based on the calendar year end.
What follows is an outline of steps which should be considered, before the end of the 2020 calendar year, by Canadians who have an RRSP and/or a TFSA.
Timing of RRSP contributions
Making a spousal RRSP contribution
Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plan (RRSP) in his or her spouse's name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse's income, at a (presumably) lower tax rate. However, the benefit of having withdrawals taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year in which the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2020, the contributor can claim a deduction for that contribution on his or her return for 2020. The spouse can then withdraw that amount as early as January 1, 2023 and have it taxed in his or her own hands. If the contribution isn't made until January or February of 2021, the contributor can still claim a deduction for it on the 2020 tax return, but the amount won't be eligible to be taxed in the spouse's hands on withdrawal until January 1, 2024. It's an especially important consideration for couples who are approaching retirement who may plan on withdrawing funds in the relatively near future. Even where that's not the situation, making the contribution before the end of the calendar year will ensure maximum flexibility should there be an unforeseen need to withdraw funds.
Turning 71 during 2020
Every Canadian who has an RRSP must collapse that plan by the end of the year in which he or she turns 71 years of age — usually by converting the RRSP into a registered retirement income fund (RRIF) or by purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31st is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31st of that year. Once that deadline has passed, no further RRSP contributions are possible.
Planning for TFSA withdrawals and contributions
Each Canadian aged 18 and over can make an annual contribution to a Tax-Free Savings Account (TFSA) — the maximum contribution for 2020 is $6,000. As well, where an amount previously contributed to a TFSA is withdrawn from the plan, that withdrawn amount can be re-contributed, but not until the year following the year of withdrawal.
Consequently, it makes sense, where a TFSA withdrawal is planned (or the need to make such a withdrawal might arise) within the next few months to make that withdrawal before the end of the calendar year. A taxpayer who withdraws funds from his or her TFSA before December 31st, 2020 will have the amount which is withdrawn added to his or her TFSA contribution limit for 2021, which means it can be re-contributed, where finances allow, as early as January 1, 2021. If the same taxpayer waits until January 2021 to make the withdrawal, he or she won't be eligible to replace the funds withdrawn until 2022.
The month of December is a busy time for most Canadians, and usually not a time when the details of making contributions to an RRSP or withdrawals from a TFSA are top of mind. The deadlines for taking such actions are inflexible, however, and taking the time to take necessary steps now means one less thing to remember as the December 31 deadline looms.
WHETHER AND WHEN TO STOP CONTRIBUTING TO THE CANADA PENSION PLAN (SEPTEMBER 2020)
When the Canada Pension Plan was introduced in 1965, it was a relatively simple retirement savings model. Working Canadians started making contributions to the CPP when they turned 18 years of age and continued making those contributions throughout their working life. Those who had contributed could start receiving the CPP retirement benefit at any time between the ages of 60 and 65. Once an individual was receiving retirement benefits, he or she was not required (or allowed) to make further contributions to the CPP, even if that individual continued to work. The CPP retirement benefit for which that individual was eligible therefore could not increase (except for inflationary increases) after that point.
Retirement looks a lot different now than it did it 1965, and the Canada Pension Plan has evolved and changed to recognize those differences. What that means for the average Canadian is much more flexibility in determining how to structure both their contributions to the CPP and the receipt of CPP retirement benefits.
While greater flexibility in retirement income planning is always a good thing, having more choices brings with it the need to determine which choices are the right ones in one's particular circumstances. And, when it comes to CPP, many Canadians must decide on when it makes sense to stop making CPP contributions.
The need to make that choice arises where a decision is made to continue to stay in the work force, whether part-time or full-time, even after beginning to receive CPP retirement benefits. While it has always been possible to work while receiving such benefits, it was, until 2012, not possible to make CPP contributions related to that work. A change made in that year, however, allowed individuals who continued to work while receiving the CPP retirement benefit to also continue to contribute to the Canada Pension Plan and, as a result, increase the amount of CPP retirement benefit they received each month. That benefit is the CPP Post-Retirement Benefit or PRB.
The rules governing the PRB differ, depending on the age of the taxpayer. In a nutshell, an individual who has chosen to begin receiving the CPP retirement benefit but who continues to work will be subject to the following rules:
Individuals who are 60 to 65 years of age and continue to work are required to continue making CPP contributions.
Individuals who are 65 to 70 years of age and continue to work can choose not to make CPP contributions. To stop contributing, such an individual must fill out form https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/cpt30.html. A copy of that form must be given to the individual's employer and the original sent to the Canada Revenue Agency (CRA). An individual who has more than one employer must make the same choice (to continue to contribute or to cease contributions) for all employers and must provide a copy of Form CPT30 to each.
A decision to stop contributing can be changed, and contributions resumed, but only one change can be made per calendar year. To make that change, the individual must complete section D of CPT30 (found at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/cpt30.html), give one copy of the form to his or her employer, and send the original to the CRA.
Individuals who are over the age of 70 and are still working cannot contribute to the CPP. Overall, the effect of these new rules is that CPP retirement benefit recipients who are still working and who are under age 65, as well as those who are between 65 and 70 and choose not to opt out, will continue to make contributions to the CPP system and will continue therefore to earn new credits under that system. As a result, the amount of retirement benefits which they are entitled to will increase with each year's contributions.
Where an individual makes CPP contributions while working and receiving CPP retirement benefits, the amount of any CPP post-retirement benefit earned will automatically be calculated by the federal government, and the individual will be advised of any increase in that monthly CPP retirement benefit each year. The PRB will be paid to that individual automatically the year after the contributions are made, effective January 1 of every year. Since the federal government needs information about employer contributions made, the first annual payment of the PRB is usually issued in early April and includes a lump sum amount representing benefits back to January of that year. Thereafter, the PRB is paid monthly and the PRB amount is added to the individual's CPP retirement benefit amount and issued as a single payment.
While the rules governing the PRB can seem complex (and certainly the actuarial calculations are), the individual doesn't have to concern himself or herself with those technical details. For CPP retirement benefit recipients who are under age 65 or over 70, there is no decision to be made. For the former, CPP contributions will be automatically deducted from their paycheques and for the latter, no such contributions are allowed.
Individuals in the middle group — aged 65 to 70 — will need to make a decision about whether it makes sense, in their individual circumstances, to continue making contributions to the CPP. Some assistance in making that decision is provided on the federal government website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-post-retirement/benefit-amount.html, which shows the calculations which would apply for individuals of different ages and income levels.
More information on the PRB generally is also available on that website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-post-retirement.html.