Tag Archives: OAS

Do I Want my Retirement Income to Come From Dividends and Interest or Capital and Growth?

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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.

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Do you plan to live off your capital or your income in retirement? Have you been investing strategically to achieve your goal? Please share a glimpse of your plans with a comment.

How to Use StudioTax 2013 for a Simple Retired Person’s Tax Return (T4AOAS, T4AP, T4A, T4RIF, T5)

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Recently I had a chance to test using StudioTax 2013 for a retired relative’s tax return. This relative had already calculated her taxes using a pencil, the paper forms and a calculator. I used her T slips and her personal information to complete the same tax return using StudioTax 2013. Here’s how I did that and what the results were.

This person was

  • a Canadian citizen
  • still living
  • residing in Ontario at year end
  • single with no change in marital status or common law status during 2013

What You Need to File a Simple Tax Return for Someone Receiving CPP, OAS, and some RRIF and Interest Income

  • Your Social Insurance Number
  • For the company pension payments received, a T4A
  • For the CPP received, a T4AP
  • For the OAS received, a T4AOAS
  • For the RRIF income, a T4RIF for each RIF
  • For the interest income, a T5 for a GIC and the added up amount for a bank account
  • A copy of the StudioTax 2013 software downloaded to and installed on your computer

What Was the Result of Using StudioTax 2013 to Calculate a Pensioner’s Income Tax Return?

I am not a trained tax professional, nor do I even look like one. I can only say that the program generated the same results as hand calculation did. For me, that is acceptable.

It is important to note that the program did not prompt me to enter her bank account interest. I had to remember to add that in myself.

How to Use StudioTax 2013 to Calculate a Retired Person’s Income Tax Return

  1. Double click on the StudioTax 2013 icon.
  2. Click on the button: Create a new return
  3. Read the information about the Quick Start Wizard, then click Next.

The information on the first few screens is used to fill in parts of Page 1 and Page 2 of your T1 General 2013 Tax Return form.

  1. From the Title: drop-down list select the appropriate honorific.
    For example, I selected: Miss
  2. In the appropriate box, type your First Name:, Last Name: and Initial.
  3. Select the appropriate choice by clicking on the radio button beside:
    • Check if this is your first return.
      For example, if you have never filed a Canadian income tax return before, click the dot beside this.
    • Check if your name changed since your last return.
      For example, if you legally changed your name after a marriage, divorce or deed poll, click the dot beside this.
    • Otherwise, check to confirm that your name did not change since your last return.
      For example, if you’ve been filing your taxes for years under this same name, this in the one to click the dot beside.
  4. In the appropriate box, type
    • your Social Insurance Number and
    • the Year of your birth.
  5. From the drop-down lists, select the month and day of your birth.
  6. Click Next.

On the second screen

  1. In the appropriate boxes type
    • your address
    • your postal code and
    • your telephone number/s.
  2. From the drop-down lists, select
    • your province for your mailing address
    • which province you were resident in on December 31, 2013.
    • if applicable, the date you moved your residence to a province or territory
    • if applicable, your current province or territory if different from the mailing address
    • if applicable, your province or territory of self-employment
  3. Click to answer if your home address is the same as your mailing address.
  4. Click Next.

On the third screen

  1. From the drop-down list, select whether you are
    • married,
    • common law,
    • single,
    • widowed,
    • divorced or
    • separated.
  2. Click the box if your marital status changed during the year.
  3. Click to select the radio button If you want to link your income tax return with your spouse’s (which allows the computer to try to optimize who claims certain tax deductions and credits).
  4. If you selected Married, Common Law, etc, type in the information in the appropriate boxes and select from the drop-down lists for your spouse’s
    • First Name:,
    • Last Name: ,
    • Spouse’s SIN:,
    • Spouse’s Date of Birth Year:,
    • Month:, and
    • Day:.
  5. If your spouse is a non-resident, check the box.
  6. Click Next.

On the fourth screen
If you became a Canadian resident or ended your Canadian resident status, click the appropriate box and select the appropriate date.

If you are a newcomer, read the information about non-refundable tax credits.

Click Next.

On the fifth screen
If this is a return for a

  • deceased person
  • pre-bankrupt person

click the appropriate box, select the appropriate date and if applicable, enter the income after the bankruptcy.

Click Next.

On the sixth screen
Click to select the radio button beside the appropriate choice for

  • your language of correspondence with the CRA
  • whether you are applying for the GST/HST credit
  • whether you held foreign property, including stocks outside of a RRSP, with a cost of more than $100 000 CAN.

Click Next.

On the seventh screen
Click to select the radio button beside the appropriate choice for

  • Are you a Canadian citizen
  • Can the CRA give your address etc to Elections Canada

Click Next.

On the eighth screen
Finally, something TAX related!

This screen lists the tax forms you have received that you want to use to complete your return.

Read through the list and if you have one or more of those forms, click to select the box beside it.
For example, for my test return, I clicked to select the boxes beside

  • T4A
  • T4RIF
  • T4A(OAS)
  • T4A(P)
  • T5

Click Next.

On the ninth screen
Check the box beside any of the common tax situations that apply to your return, if you are claiming

  • RRSP contributions and/or repaying HBP or LLP
  • tuition fees
  • charitable donations
  • child care expenses and/or dependants
  • political contributions
  • medical expenses

Click Next.

The next section of the program begins.
This is where it lets you type in the information found in each box of your various T slips.

T4A
For my specific test, the T4A screen opens first.

My relative had one T4A for a company work pension.
From that T4A, I had information to enter for

  • Box 16: pension
  • Box 22: income tax deducted, and
  • Box 28: Other employment income

The program offers me the choice of entering several T4As if I have them. To do that, it is set up with several columns.

Each column is headed with the “name” of the T4A that is being entered, such as T4A(1), T4A(2), T4A(3) etc.

On my computer, you can’t see the third, fourth, and fifth T4A slips unless you click on the arrowhead pointing right above the line that says T4A(1)  T4A(2).

There are also many, many boxes of information that could be on a T4A and which need to be reported. To see them all, there is a scroll bar with arrowheads that displays vertically at the right hand side of the screen.

I only have the three numbers to enter.

  • I click once on the empty box beside 16 and below T4A(1), and I type the amount of pension received as reported in Box 16 of my relative’s T4A slip.
  • I then click once on the empty box beside 22 and type the amount of tax withheld, as stated on the real T4A slip.
  • Finally, I click once on the empty box beside 28 and type in the Other Income.

If I had another T4A slip I would click on the appropriate empty boxes under the column heading T4A(2) and type in that data. I would repeat this with a new column for each new T4A slip.

Now that I have entered all the data that is on my relative’s T4A slip for their company pension, I click on the Next button.

T4RIF
For my specific example, the next screen that opens is for entering data for T4RIFs. My relative had 2 T4RIFs to report.

Fortunately, T4RIF forms are easy to type into the program.

For the first form, in the column under the heading T4RIF(1), I click on the empty boxes beside the appropriate box numbers and type in the amounts. So I click and type

  • for Box 16, the amount received from the RRIF
  • for Box 28, the amount of income tax deducted before my relative received the payment

Then for the second form, I repeat the process but under the heading T4RIF(2).

If there was another T4RIF to enter, I would have to click on the scroll bar above the heading T4RIF(2) to see another blank column headed T4RIF(3).

Once I’ve entered the numbers for the two RRIF slips, I click Next.

T4A(OAS)
For my specific example, the next screen that opens is for typing in the information for my relative’s T4A OAS slip. This is a tax slip for the Old Age Security payments she received.

In the column under the heading T4AOAS(1), I click on the empty boxes beside the appropriate box numbers and type in the amounts. So I click and type

  • for Box 18, the amount received from OAS
  • for Box 22, the income tax deducted

It’s a bit strange to see column headings for T4AOAS(2) etc. I don’t think there is any way that one person could receive more than one OAS income but I could be wrong. (If you know how someone could get 2 T4A(OAS) slips, please share your insights with a comment.)

Click Next.

T4A(P)
For my specific example, the next screen that opens is for typing in the information for my relative’s T4A(P) slip. This is the tax slip for the Canada Pension Plan, CPP, payments she received.

In the column under the heading T4AP(1), I click on the empty boxes beside the appropriate box numbers and type in the amounts. So I click and type

Click Next.

T5
For my specific example, the next screen that opens is for typing in the information for my relative’s interest income earned on a GIC.

In the column under the heading T5(1), I click on the empty boxes beside the appropriate box numbers and type in the amounts. So I click and type
for Box 13, interest from Canadian sources

Click Next.

HBP, Transit Costs, Student Loans and Disability Amount for Self
If applicable, on this next screen you would enter

  • Your Home Buyer’s Plan amount
  • Public Transit Passes amount
  • Interest paid on your student loans
  • Disability amount for self

My relative did not have any need to enter this information.

Click Next.

Ontario Credits
The next screen contains very important information for those eligible to apply for the Ontario Trillium Benefit and/or other Ontario Credits. If any of the information applies to you, copy down the information for later use.

Click Next.

Last Wizard Screen
Read the message.

Click Finish to continue.

You will now return to the main StudioTax 2013 screen.

Reviewing Your Income Tax Report Generated by StudioTax 2013 for a Retired Person’s Tax Return

Now that you are back to the main StudioTax screen, you can start reviewing your tax forms.

Down the left side of the screen is a list of each of the forms commonly used and filed for an income tax return.

You will want to click on each form in turn to read in the main window what information has been entered for your tax return. Look for errors and omissions. Do NOT submit your taxes without reviewing them for accuracy!

I started by clicking on the heading T1 Page 1 on the list on the left side of the screen.
That opened the first page of my relative’s T1 General for review.

How to Correct an Error Using StudioTax 2013 (Before Filing Your Return)

While reviewing T1 Page 2, I noticed an error in line 115, Other pensions or superannuation. Instead of the 10 000 reported on my T slip, it said 1 000. To check the source of the error, I double clicked on the 1 000.

The StudioTax program opened the form that resulted in the 1 000 being displayed. I could see that the amount Computed from T4A slip was incorrect. I could not correct it here, however.

Instead, I had to look down the list at the left side of the screen for the heading T4A under the T slips subheading.

Clicking on that T4A link opened the screen where I entered each of the T4A slips. Here I could see where I entered 1 000 instead of 10 000 for Box 16. I corrected the entry.

When I clicked on the link for the T1 Page 2 slip, on the list on the left side of the screen, and checked the value for line 115, it now correctly reported 10 000. My taxes had also been re-calculated.

Caution! Remember to Review Each Form!

It is important to review all of the numbers you entered.

If possible, it is also valuable to review the actual Schedule 1 and Provincial Tax forms. StudioTax 2013 does not prompt you for all situations.

For example, remember I said that my relative had $49 of interest from her bank account?

Because the amount was under $50 she was not sent a T5 slip.

StudioTax did not ask her if she had any other interest income to report.

I had to notice on her T1 Page 2 that she needed to report the $49 interest on line 121 and on Schedule 4.

So from the list at the left side of the screen, I clicked on Schedule 4.

Section II of the form was already completed with one line: “From information slips” and the interest on her GIC that was provided by a T5.

I typed on the second line “CIBMO bank account interest” and the value, $49.

The form was then updated and the taxes were re-calculated.

Conclusion

After reviewing all of the information on the forms and schedules, and after making the two corrections I mentioned above, I compared the StudioTax results with the results my relative arrived at by completing the forms by hand. The answers were identical.

I am not educated or accredited to calculate taxes. I can only state that both the program and the hand calculations resulted in the same values on both tax returns.

Next Steps for Using StudioTax 2013

First I saved the return by clicking on the Save icon at the top of the screen.

Next, I could submit the tax return using NETFILE. In this case, my relative had already mailed in a paper return, so I didn’t.

IT IS CRITICAL TO REMEMBER THAT YOU MUST EITHER
PRINT AND MAIL YOUR RETURN; OR
NETFILE YOUR RETURN BY APRIL 30 2014.

StudioTax does NOT automatically submit your tax return. You must go through its instructions and NETFILE or print out your forms and schedules and submit them, along with the appropriate slips, by mail.

I will not list the NETFILE instructions here because I did not NETFILE this test case.

Related Reading

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Did you use StudioTax to calculate and/or submit your return this year? Did you find anything you had to correct when you reviewed your forms and schedules before submitting? Please share your experiences with a comment.