Sweet 65

Once we pass age 30, most of us find that birthdays just aren’t as much fun as they used to be. But here’s a birthday you can still get excited about: your 65th. That’s because if you’re part of a typical Canadian couple, that’s when you’ll go from being a net taxpayer to a net taxpayee. By that we mean you will essentially cease to pay any taxes at all, because the government will give you a bigger payout every year than you give to the government.

To show how that can happen, we’ve followed the fiscal fortunes from mid-life to retirement of a typical (but fictional) Canadian couple, who we’ll call Bill and Susan. At each stage, we’ve costed out what they pay in income and payroll taxes, versus what they get in government income and subsidies. We found that Bill and Susan go from paying $14,800 a year net in taxes while both are working at age 40, to paying about $7,400 in taxes at age 64, to receiving $10,200 a year at age 66 after they retire. And believe it or not, those numbers don’t even include payments from the Canada Pension Plan (CPP). If we did include that income, the fiscal shift would be even greater.

To do the complicated tax calculations involved, we relied on the expert help of Ali Jaffer, a certified general accountant from AR Jaffer Professional Corporation of Mississauga, Ont. He spent hours crunching the numbers, so you don’t have to. Now, if you’re ready, let’s follow Bill and Susan’s fiscal journey and see how you too can benefit from a big reversal in the tides of taxation.

A shift in fiscal fortune
What causes this change from being a net payer to a net receiver of government money? Three major factors. The first is a reduction in income. You need a lot less to live comfortably in retirement than you did at mid-life, so when they stop working, most Canadians are able to cut mid-life costs such as hefty mortgage payments, money spent on raising kids, and work-related costs. Because you need less income to maintain the same lifestyle, you’ll pay lower income taxes.

The second factor is the bevy of generous senior income programs that Canada offers, such as Old Age Security (OAS), which normally kick in at age 65. Finally, a host of tax breaks for seniors apply at age 65, allowing them to pay less income tax than 64-year-olds with the same income. Many Canadians have no idea how generous these tax breaks are until they prepare their first tax return after retiring, says Jaffer. Then they get a pleasant surprise: “It’s often a lot less tax than they expected,” he says. These tax breaks include pension income splitting, the age credit, and the pension income credit, as well as other provincial perks, and they can add up to thousands of dollars a year.

Bill and Susan at 40
Now let’s have a look at how these factors impact the fortunes of Bill and Susan as they progress through life. We’ll start with them as a typical financially-stretched 40-year-old middle-class couple with two kids, Kate, age 4, and Matt, age 2. Both Bill and Susan work full-time, with Bill earning $35,000 a year and Susan earning $65,000, for a total of $100,000. (That’s a little more than the median but less than the average for two-spouse households with children in Canada.) They just bought their first house a few years ago, so they carry a big mortgage, and they spend $14,000 a year on day care. Because of those high costs, they aren’t able to save for retirement at this stage, so they have no RRSP contributions at the moment. They do get federal child-related subsidies worth $3,400 and they get a tax deduction for their child-care expenses from Bill’s income. But they still pay a combined $15,100 in income tax and $3,100 in payroll taxes. That results in a tax bill, net of subsidies, that totals $14,800 a year.

Bill and Susan at 64
Now let’s consider what Bill and Susan’s fiscal situation might look like when they are 64 and nearing retirement. They’ve made a lot of financial progress since they were 40. Their house is now paid for, they’ve saved up a decent-sized nest egg, and they’re on the verge of retiring. They’re both working part-time and earn a combined $50,000 a year. (Susan earns $30,000, while Bill earns $20,000.) This allows them to cover their living costs, so they can keep their nest egg intact for their long-anticipated retirement. However, they are not adding new savings to their nest egg at this point, and therefore don’t currently contribute to RRSPs. Their kids are financially independent and long past the point of generating child-related tax breaks. With their income much reduced from their peak earning years, they now pay income taxes of just $5,700, plus $1,700 in payroll taxes, for a total tax bill of $7,400 a year.

Bill and Susan at 66
When Bill and Susan turn 65, they officially become seniors, and they fully retire. At age 66, they continue to enjoy the same income they did at age 64, with Susan earning $30,000 and Bill earning $20,000, for a total of $50,000. (That’s more than the median income for a seniors couple, but a little less than the average.) But neither is working for a living now: they draw their income from a combination of OAS, CPP, modest company pensions, and their RRSPs. All of this income is taxed at regular tax rates, but they pay much less tax than they did on the same income two years earlier. Now their income tax bite is only $3,400 a year, compared to $5,700 at 64.

As well, they have no payroll taxes, they get a small provincial property tax grant worth $334, their provincial government drug program covers about $700 of their $1,000 in annual prescription drug costs, and OAS pays them $12,500. As a result, they net a cool $10,200 a year from the government more than they pay in taxes.

A bigger break than families
You’ve seen how the tax and subsidy system is designed to give seniors a break. But the government also tries to give moderate-income families with kids a few breaks as well. So which group does the tax system treat most generously, seniors or moderate-income families? It turns out that seniorhood beats motherhood hands down.

To show this, we compare Bill and Susan’s tax and income situation at age 66 with that of another fictional couple. Jim and Nancy are both 40, and they have a young family with two kids at home. Both couples have the exact same annual income of $50,000. In Jim and Nancy’s case, Jim is essentially the sole breadwinner and his salary supports the family, while Nancy stays home to look after the kids, Leah, age 4, and Evan, age 2.

You’ve probably realized by now that a retired seniors couple like Bill and Susan who own their own home mortgage-free can live pretty comfortably on $50,000 a year, which is typical for retired seniors. But $50,000 in the hands of a 40-year-old couple with two kids, like Jim and Nancy, is more of a struggle. On that kind of income, Jim and Nancy can’t afford a house in a typical Canadian city. As a result, they rent a two-bedroom apartment and pay quite a bit more for accommodation than Bill and Susan pay for their much larger and nicer three-bedroom detached house.

Luckily, like Bill and Susan, Jim and Nancy have their tax breaks too, such as the spousal credit, the Child Tax Credit, the Universal Child Care Benefit, and the children’s fitness program credit. They could bring their tax bill down even further if they were able to pile money into RRSPs, but at this point they’re just keeping their financial heads above water and can’t afford to save.

Unfortunately for them, however, after everything is calculated, Jim and Nancy’s benefits fall far short of the government’s generous treatment of Bill and Susan. Just looking at income taxes by itself, our mid-life couple pays $6,100 while our seniors couple pays only $3,400—a surprising outcome considering the two couples have the exact same income. If you add in payroll taxes, government income and child-related subsidies, the net tax hit to our 40-year-old couple is reduced to $3,100, while our seniors couple becomes a net recipient of about $10,200 a year. That leaves our seniors couple $13,300 ahead of our mid-life couple.

That’s why when you turn 65, you should thank your lucky fiscal stars as your friends sing you a resonant Happy Birthday. Those government cheques will make for a very sweet birthday present—and it’s one that will keep on giving.