To the editor:
Federal election promises and the federal budget article in the Capital News on March 23 Seniors, Students Take Note, were my final promptings to write this letter.
A portion of that article stated: ‘Seniors will also see some direct benefits: The Guaranteed Income Supplement (GIS) for low-income seniors will be boosted with up to $600 of extra money a year for single people who earn less than $4,400 from their savings and other non-government income. It will go up to $840 per couple who earn less than $7,360 a year. The government says the new money will cost $300 million a year and reach 680,000 seniors.”
The Guaranteed Income Supplement provides a monthly non-taxable benefit to low-income Old Age Security recipients living in Canada. This is calculated on your last year’s taxes and paid in the following year from July to June. When applying for the GIS benefit, you, and in the case of a couple, you and your spouse or common-law partner, must report the following income: Canada Pension Plan or Quebec Pension Plan benefits, private pension income and super annuation, foreign pension income, RRSPs that you cashed during the year, Employment Insurance benefits, interest on any savings, any capital gains or dividends, income from any rental properties, any employment income minus allowable deductions including your Canada Pension Plan and/or Quebec Pension Plan contributions and your Employment Insurance Premiums.
Subtract the lesser of the result of the calculation or $3,500;
• income from other sources such as workers’ compensation
• payments, alimony, etc.
• sources such as Workers’ Compensation payments, alimony, etc.
Benefits received from the Old Age Security program, including the Guaranteed Income Supplement and the Allowance, are not included as income.
Something that not everyone is aware of is how the GIS is affected by income, especially relating to RRSP income. The $3,500 income limit that you are allowed to earn before affecting the GIS does not come into play for RRSP withdrawals. Every $1 of an RRSP withdrawal starts reducing the GIS. If the only income you have is your RRSP withdrawal you cannot deduct the $3,500.
Once the senior begins bringing in income, the Guaranteed Income Supplement is clawed back by 50 cents for every $1 of income. It will continue to be clawed back until the maximum income threshold is met.
A $1,000 RRSP withdrawal will reduce your GIS by $500. Income from other sources like the CPP pension and earnings is treated the same, however only on amounts over and above the $3,500.
Also, many receiving the GIS pay income tax, so you can also expect to pay about $200 in income tax.
Therefore, in the year you cashed in your RRSP you got to keep $800 of the $1,000 because you paid $200 in income tax. Then your GIS for the following year will be reduced by $500.
So really, the net income from your RRSP to yourself was $300. If you have $20,000 in RRSP funds this would translate to $300 x 20 = $6,000 for you. (Based on 15 per cent federal tax and five per cent provincial tax.)
What’s worse is that to make up for the lower GIS and OAS payments you may have to take out even more RRSP/RRIF monies to survive. And that can put you in an even higher tax bracket.
Consider that those RRSP withdrawals are included in taxable income; therefore, depending where you live, they can increase what you would pay for home care, Meals on Wheels, prescription drugs, B.C. medical and nursing home care. This list may not be all-inclusive.
Your GST/HST refund could be reduced and if you are a lower income renter, you could lose the Shelter Aid for Elderly Renters (SAFER) grant from the provincial government.
The GIS reduction rate of 50 per cent make RRSPs a poor choice for many low-income people. However, a Tax Free Savings Account (TFSA) is a good idea to consider in your financial planning because you can make tax-free withdrawals.
Consider cashing-out your RRSP before your 65th birthday. In fact before your 64th birthday because the prior years income tax will be used to calculate the amount of GIS that you get for the following July to June. If you withdraw an amount of your RRSP funds that eliminates your GIS, there is no carryover of the remaining RRSP withdrawal to the next year. Doing this might be helpful for some; however, you will not want to move yourself into the next tax bracket.
This letter was written for the purpose of informing low-income people and seniors. Also to seek our political parties consideration for change on how the RRSP affects the GIS and to bring seniors above the poverty level.