October 1996

Impact of New
Seniors Benefit Clawback

© Talbot Stevens

Last month's Strategy Sheet introduced how the proposed Seniors Benefit legislation significantly increases taxation for middle income seniors in the form of a clawback.

Those who turn 65 after 2001 and have a total family income of between $30,000 and $60,000 will face the normal 40% marginal tax rate and a 20% after-tax clawback of their Seniors Benefit.

This means that millions of middle income seniors will net only 40 cents of every extra dollar they make!

The problem with the Seniors Benefit lies in the magnitude and number of people affected by the clawback. Relative to the OAS clawback, this clawback is much worse for the following reasons.

The OAS clawback was 15% of a taxable income. For someone in the middle tax bracket, 40% of this income would have been lost to the government anyway. So the after-tax loss was really only about 9%.

Since the Seniors Benefit is a tax-free payout, the new clawback is an after-tax loss of 20% (for families with incomes over $26,000). Therefore, the real clawback rate is more than double what it was.

Secondly, the OAS clawback started at about $53,000 of individual income. A couple could have made as much as $106,000 before losing any OAS. Now a couple faces the 20% clawback on total family or individual income above $26,000 — less than one fourth of the previous threshold for a couple with perfectly balanced incomes.

Finally, the clawback discriminates against married people. For both single and married seniors, the clawback starts at the same $26,000 level. Thus, two single (perhaps cohabiting) seniors could make twice as much money without losing any of their Seniors Benefits.

The humourous point in all of this is that the government declared that there were no tax increases in the 1996 budget! I suppose that this is technically possible — if everyone dies before age 65.

This significant increase in clawback (a.k.a. taxation) makes it critical to re-evaluate all strategies in terms of their ability to produce after-tax, after-clawback income.

The public, and most of the financial industry, does not yet understand the fundamental impact of the Seniors Benefit changes: “Do RRSPs still make sense?

The foundation of financial planning to “invest in RRSPs early and as long as possible” became less attractive as a strategy and may no longer be valid. Most RRSP contributions are made under the premise that the money will be withdrawn at the same or lower tax rate. We know now that this will not be the case for most middle income seniors.

Detailed strategies to minimize the clawback will be discussed next month.

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