September 1996

New Seniors Benefit Escalates Taxation,
Changes Retirement Planning

© Talbot Stevens

Legislation introduced in the March federal budget will radically increase the taxation faced by seniors and change retirement planning approaches that made sense for decades — until now.

The government's intention is to target the benefits more to lower income seniors. Actuary Malcolm Hamilton, of William M. Mercer Ltd., projects that individuals or couples with more than $40,000 of income will be worse off with the new system.

The new Seniors Benefit is to replace the old age security (OAS) and guaranteed income supplement (GIS) programs, age credit, and the $1,000 pension credit for those who turn 65 after Dec. 31, 2000.

Starting in 2001, seniors will receive a tax-free, inflation-indexed payment, depending on their income. With absolutely no other sources of income, the maximum annual benefit projected for single seniors is $11,420, and $18,440 for couples.

Payouts are reduced or clawed back depending on all other sources of income, including pensions and RRSP/RRIF withdrawals. For those below the clawback threshold, this means that all income after age 65 will face an additional tax of 20% to 50% in the form of Seniors Benefit clawback. This double taxation penalizes retirement income from all sources, including forced RRIF withdrawals.

The clawback rates at projected income levels are as follows.

Seniors Benefit Clawback Rates
Annual Income Clawback Rate Total Tax Rate
0 to 12,500 (couples 16,000) 50% 50 - 77%
12,500 (couples 16,000) to 26,000 0% 27%
over 26,000 20% 47 - 74%
$52,000+ (single)
$78,000+ (couple)
benefit gone 40 - 54%
* clawback rate plus marginal tax rate

Lowest income seniors have almost no incentive to earn extra income. They face a 27% tax bracket and a whopping 50% Seniors Benefit clawback, for a total tax rate of 77%!

Notice that all seniors who have worked hard enough to put themselves in the middle income bracket of $30,000 to $60,000 face a marginal tax of about 40% and a clawback of 20%, for a total marginal tax rate of 60%.

None of this is an issue for the wealthy who will be well above the $52,000 threshold for singles, or $78,000 for a couple. They won't receive any benefit.

To avoid unnecessarily losing 20% to 50% of your savings to the clawback, it is critical to see your advisor and evaluate the impact of the Seniors Benefit on your specific situation.

Next month's Strategy Sheet will focus on strategies to maximize the Seniors Benefit.

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