CPP | Financial Crooks

It’s that most horrible time of year again: tax time. I got my forms in the mail and took a peek at the T1-General Guide. I don’t usually look at car accidents but somehow I can’t help but look at the tax guide once I see it sitting on the table….Here’s what I found that’s new for a 2015 tax return for filers who have children.

Why Did I Get a RC62 Universal Child Care Benefit Statement in the Mail?

If your children were 6 or older but younger than 18 you may have received payments last year of the revised Universal Child Care Benefit. It may have been quite a while since you last received any UCCB and you may have forgotten that it is taxable. Or at $60/month per eligible child aged 6-17, you might not even have noticed the money landing in your account.

Now, unfortunately, since the election is long past, we have to pay the taxes on that money.

That’s right, they didn’t withhold any taxes at source but the “benefit” is taxable income in the hands of the lower-earning parent.

So I will get to pay back about half of what we received.

There is also no longer any non-refundable tax credit for having a child of any age.

You report the amount you received, which is reported in Box 10 of your RC62, on line 117 of your return if you are the lower-net-income spouse or common-law partner.

What Happened to My Federal Non-refundable Tax Credit for My Children?

You used to claim $2 255 per child of the appropriate age on the Federal Tax Schedule 1 form on line 367. (By the time you finished the math, it was only 15% of that amount, or $338.25 per child.) If you are looking for it on the 2015 schedule, you won’t find it.

The problem with the non-refundable credit was that if a family was really low income, they weren’t paying any tax so they could not apply the credit to save any money.

Starting in 2015, the credit has been removed and instead all families get a taxable Universal Child Care Benefit. If the family is really low income, they will not have to pay any tax on this benefit and therefore it will help them. If a family has a moderate or high income, they will have to pay back some or a lot of this benefit both as federal income tax and as provincial income tax.

If your income was $75 000 a year before the $720 a year benefit for your one 7-year-old child, you will probably only get a benefit of $483 after tax in Ontario, based on using the Ernst and Young 2015 online personal tax calculator.

That’s about $145 more than the old non-refundable tax credit gave you. But it’s a lot less than the $720 that the advertisements were bleating about before the election!

If your income was $200 000 a year before the $720 a year benefit for your one 7-year-old child, you will probably only get a benefit of $346 after tax in Ontario, based on using the Ernst and Young 2015 online personal tax calculator. That’s very close to the old $338.25 per child that the non-refundable tax credit covered.

New Tax Form: The T4-A(P) for the CPP Children’s or Child’s Benefit

Many taxpayers have been dismayed to open envelopes this month and find a new tax slip: a T4-A(P) for their child or children’s benefit received from the CPP because one of the child’s parent’s has died. In previous years the government did not automatically send out this slip.

You can read what needs to be done with the slip by the parent, or child, over on Helpful Crooks.

Stay tuned for more exciting tax news!

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Does your mail box suddenly start overflowing around this time of year with tax slips? Did you get any new ones this year? Please share your experiences with a comment.

For many years, I hoped to retire on the income generated by our fixed income investments. Since 2008, however, the rates paid by these types of investments have drifted down so low I’ve had to re-consider our options. I’ve been trying to decide whether we now intend to retire on income from our dividends and interest payments or whether we intend to live off primarily the capital gains and principal generated by selling part of our holdings: and I need to understand how that will affect what we choose to invest in now before we retire.

Do You Plan on Living Off What Your Capital Earns or on Living Off the Capital Itself?

Yes, I know that if you are planning to live off of the capital itself, you will most likely be living off a blend of the income that capital earns and the capital gains it makes. Your income might be a combination of dividends, interest, capital gains and liquidated principal.

However, the broader question is: do you intend to spend your capital in retirement to live on? Or do you hope to die with that capital intact, leaving it as a legacy to your relatives, friends or deserving others including charities?

What Family Experience Can I Draw On to Evaluate the Options?

This is a question many of my older relatives have faced. In general, since there are no hugely wealthy people in our family tree, their capital has been mostly invested in their homes.

The only practical ways they could access that capital were

via selling their home and renting or moving in with a relative or friend, or
by taking out some form of loan (C.H.I.P., HELOC etc.) that had to be re-paid when the home was sold.

We’ve had relatives who did access the home ownership capital and use it and others who kept their home in reserve in case they needed the capital to pay for long-term end-of-life care.

A small minority of my relatives had additional savings. Some of them have not touched the principal of those savings but have used the income that they generate to supplement their pension income. An even smaller minority has gradually spent those savings.

Looking at various family members’ retirements, I’ve tried to see what would work best for us. It’s complex because different people retired into different world situations and financial times. Some had no work pensions. Others had defined benefit pensions. The only common thread is none of them were reckless spenders.

Retirement Spending Plans Can Change With Age

One thing I did notice is that the older people grew, the more reluctant most became to spend. They had all seen friends and relations end up needing expensive end-of-life care. They had seen some whose finances could not stretch to provide the care they would have preferred. Home care, for example, is often the most expensive type of care for most people because almost none of the costs are covered by the government. The quality of nursing home you can afford is also often dependent on how much money you have to buy additional services or to provide care elsewhere while you wait for an opening to become available at a favoured location.

For that reason, many of them would not consider selling their house or getting a loan against the value of their house. They were counting on their houses to provide a small nest egg to pay for care should the need arise.

Others also became reluctant to change homes because the familiarity and proximity to life-long friends provided great comfort.

These observations led my husband and I to the knowledge that if we intend to move to free up some of the value of our current home, we’d better plan on doing it near the beginning of our retirement before we become too risk averse.

Can You Count on Funding a Retirement from Capital Gains?

There are various types of capital gains. The gain comes if you sell something for more than you paid for it. In theory, you could then use the gain for income and re-invest the original principal in something that can earn you a second capital gain. In reality, many people use both the gain and the re-gained principal for income. They just sell less of the investment and leave the balance for the next time they need income.

What Types of Investment Can Generate Capital Gains?

You can realize a profit on

Stocks and shares in companies
Real estate
Investing in tangible goods such as coins, precious metals, jewels, art, antiques, etc.

None of these investments guarantees an investor will realize a capital gain when they sell the investment. All of these investments can actually suffer a loss.

Still, some of these investments offer a measure of reassurance when you look at their historical trends. Stock markets generally move up over the long term. Real estate in major cities in Canada has usually gone up in value, although the forces that created that demand in the 1950s are very different from those at work now. Tangible goods have bounced every which way in value but some like precious metals and raw gems have mostly increased in value over time.

Am I assured that investing in, say, stocks will guarantee me a retirement income? No.

But I can’t think of any other type of investment that will guarantee me an income either.

Well I can think of one: Maybe buying an annuity would. That would shift the need to make a steady income from a chunk of capital from me to the annuity issuer. Given the low rates per $100 000 invested in an annuity right now, though, it doesn’t seem like a great solution.

Can You Count on Funding a Retirement from Investment Income?

There’s two parts to this question:

Can you stockpile enough investments to earn a sizeable income?
How reliable is that income?

What Types of Investment Can Generate a Retirement Income?

Traditional means to create investment income include

Dividends from shares and stocks and privately-held companies
Dividends from preferred shares
Interest income from bank accounts, GICs, Term Deposits, T-bills and money market instruments
Interest income from government and corporate bonds
Interest income from private loans and mortgages
Return of capital from various investments
Distributions of various types from income trusts (There are still some income trusts available including Real Estate Income Trusts (REITs) and food-related trusts such as the Keg, A&W etc.)

How Reliable Is the Retirement Income from These Types of Investments?

Most of these types of investments yield 6% before tax or less on the day you buy them.

Many of these types of investments do not guarantee they will continue to provide the same rate of income.

For example, a 5-year GIC issued today does guarantee your rate of return for the next 5 years; but there is no guarantee that you will be able to negotiate a similar rate of return for the next interval once the certificate matures.

Dividends can also change. Many dividends have a history of slowly growing. They are not guaranteed though and they can be reduced or stopped altogether. And if the issuer goes bankrupt, your principal can disappear along with your income stream.

How Much Do You Need to Have Invested to Earn Enough Income to Retire?

Is it even possible to save and invest enough money to generate an income for retirement?

Say you want $50 000 a year, after tax, in retirement.

Here’s the first cheat: You’re part of a couple. That makes a decent retirement income much, much easier to acquire.

You plan to each receive $25 000 a year after tax. In Ontario that means you’d have to earn about $28 600 a year before tax. (That’s a really rough estimate: you may need less if your income is from dividends in a non-registered account and/or if you have higher deductions for age or disability etc.)

Here’s the second cheat: you include receiving OAS (at age 69) and CPP as part of your retirement income plan. This makes the goal of living off of investment income more plausible.

The maximum OAS payment for someone who has lived in Canada for 40 years since turning 18 is 551.54*12 = $6618 a year. (from the Service Canada website, June 2014)
The average CPP payment 633.46*12=$7601 a year. (from the Service Canada website, June 2014)

Combined that’s $14 219. Each. See why planning for a couple is easier? If you’re not romantically partnered for retirement, you may want to consider whether there is a good friend with whom you’d like to share retirement. Just kidding. Or maybe not?

That means you’d each need to earn an additional 28 600 – 14 219 = 14 381 per year from investments. That’s 28 762 in total.

Say you were earning 6% a year from your investments. As a couple, you’d need $479 367 invested to generate the $28 762.

Of course that’s just for the first year. Then you’ll need to earn more because inflation will start changing the $50 000 income you need. Eeeep.

Still it gives you a ballpark of the minimum you’d need.

If that’s totally unachievable, you may want to skip to planning about how to supplement your income by selling investments and realizing the capital gains and/or living off the principal.

However, saving this much is achievable for us which means I haven’t given up on the income route yet.

A Preference for Funding Retirement from Income Rather than Capital Gains

All this pondering left me back where I started: I would prefer to create our retirement income from dividends, interest and other distributions rather than from realizing capital gains on investments or spending the principal. I imagine that’s what most people would prefer, of course!

So can we do it?

And if we can, how do we get there from here?

That’s what I’ll be exploring more in further articles.