Optimize your retirement income

Q: My husband is 63 and I am 58 years-old. We have defined benefit pension plans totalling $90,000 for both of us; approximately $200,000 each in RRSPs; collect approximately $50,000 per year in rental income from two properties (we have a mortgage of $100,000 combined on these properties); I’m still earning approximately $100,000 per year and plan to work for the next two years; my husband is retired and although he can collect early CPP, he opted not to do so to minimize taxes; we have 2 daughters; one is 17; the other is 31 and on ODSP due to an intellectual disability; we have no other debts. We would like to plan our financial future to time the collection of CPP, minimize taxes, minimize capital gains tax and avoid clawback of the OAS. How can we achieve this? Can I avoid or at least minimize capital gains by selling or gifting a property to my daughter(s) or should I keep them as they are nearly paid off and we are deriving rental income? —Jackie

A: Your question is multi-faceted, Jackie, with considerations ranging from investments to taxes to estate planning. As such, there are competing priorities. To be frank, I think the best answers would come from a retirement plan that mapped out your retirement income, spending, assets and taxes. But in the absence of something more comprehensive, I’ll aim to give you some high level input.

I’d estimate your retirement income in two years will be in the $70,000 to $90,000 range each depending on when you start RRSP withdrawals and your CPP retirement pensions, as well as the amount of your rental properties’ tax deductible expenses. This means that you and your husband will have to be cognizant of the potential of the Old Age Security (OAS) clawback that applies if your net income on your tax return (line 236) exceeds $72,809 for 2015.

Your husband might consider early RRSP withdrawals depending on the amount of his pension and if he has started to receive it as of yet. Since he hasn’t started CPP and is too young for OAS (starts at 65 for him), his tax bracket might be lower for the next couple years than it will be for the rest of his life. I find far too often people are preoccupied with tax deferral at all costs rather than minimizing tax over their lifetime—which to me is a more prudent strategy for those with patience and foresight.

You may also be wise to consider early withdrawals from your RRSP upon retirement, Jackie, to try to prevent moving into a higher tax bracket and losing your OAS entitlement after 71.

The timing of your CPP—which can begin between ages 60 and 70—should likely not be based solely on tax minimization. When I’ve run numbers in the past, my experience has been that tax has a fairly small impact on the timing decision. And in fact, starting early might mean you pay a bit more tax prior to 65 but then save an even more punitive OAS clawback after 65.

When determining a CPP start date, I’d be more inclined to consider things like cash flow (can starting early enable you to contribute to a TFSA); life expectancy (consider starting early if you expect a shorter life expectancy); and investment risk tolerance (consider starting early if you have a moderate to high risk tolerance for investments).

I’d probably opt to contribute to TFSAs rather than paying down your rental property mortgages if your cash flow is sufficient and if your risk tolerance allows it, Jackie. The mortgage interest is tax deductible and will likely save you some tax, while allowing you to grow some tax free savings in your TFSAs.

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The primary decision as to what you do with the rental properties should depend on whether or not you are going to need the income or capital to fund your retirement. A retirement plan, considering all reasonable future expenses—not just your current spending—will help here.

Gifting the rental properties to your daughters won’t help with the accrued capital gains tax on the increased value since purchase, but you may be able to gift or sell or somehow move the properties to them either directly or indirectly to have future capital gains accrue to them. Given your one daughter’s intellectual disability and government benefits entitlement, I’d be cautious about how you involve her in any freezing of your estate.

I’d consider this in conjunction with your estate plans, which might include what’s called a “Henson Trust.” Including a Henson Trust in your wills may allow you to pass money to your older daughter indirectly so that a trustee manages her assets when you’re gone and maximizes potential government benefit entitlement while minimizing the risks with giving her a large inheritance directly.

One strategy you might consider if you’re looking to leverage the rental properties to pass along money to your daughters is literally leveraging the properties. That is, you could use a line of credit to pay for rental property expenses like property taxes, insurance, repairs and utilities. This will increase your tax-deductible debt and corresponding interest deductions and at the same time, free up cash flow (income coming in from the rents) to gift to your daughters.

If your older daughter qualifies for the Disability Tax Credit (DTC), you should consider, if you haven’t already, a Registered Disability Savings Plan (RDSP). Based on your incomes, you can contribute $1,000 per year and get a matching contribution from the government for $1,000—with contributions growing tax-deferred for your daughter.

As you approach retirement, the key is balance. Investments, taxes and estate planning should all be considered. A retirement plan should help with some of the hard facts and prioritizing your goals will help with some of the soft facts. But the fact of the matter is, ignorance is not bliss, so take the time to consider all factors.

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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.

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.