There are very tax changes effective in 2019. The most important are the increase in the Tax Free Savings Account annual limit and the implementation of the new Canada Pension Plan rules.
Tax Free Savings Accounts
The annual limit is increasing to $6,000 in 2019, which means the annual lifetime contribution limit will be $63,500. The government has committed to increasing the TFSA limit by the amount of inflation, but all increases will be in $500 increments. As a result, with our current rate of inflation, we can expect the limit to increase to $6,500 in 2023.
It is important to understand the potential impact of Tax Free Savings Accounts on retired individuals. Key planning points include:
OAS Claw Back – Unlike RRSPs, amounts withdrawn from a TFSA are not included in income. This is important for retirees as it may impact the amount of the old age payment to be received. Once an individual’s income exceeds approximately $76,000, the OAS is reduced by 15 cents for every dollar in excess of the threshold. Once total income exceeds approximately $123,000, the OAS is fully clawed back. As a result, individuals that are unable to make the maximum contribution to both their RRSP and TFSA may favour contributions to their Tax Free Savings Account.
Age Credit – This credit is for individuals that have reached the age of 65. However, once the individual’s income exceeds approximately $36,500, the amount of the credit is reduced and it is totally eliminated when income exceeds $84,600. As a result, the credit is not impacted by withdrawals from TFSA but can be negatively impacted by income from a RRSP.
Prepayment of Children’s Inheritance – Many retired families that have achieved a level of financial security have a desire to pay a portion of their children’s inheritance before their death. This would allow their kids to utilize their inheritance when they have the greatest needs for the funds as they are managing family expenses such as mortgages, education and car payments. Many children do not receive their parent’s inheritance until after they retire.
If the parents wish to pursue this strategy, one excellent option is to make a lump sum payment to their children’s TFSA. If the children have never contributed to their TFSA, they could transfer $63,500 to each child to be placed in the TFSA.
Enhancement to Canada Pension Plan
Prior to 2019, the CPP retirement pension was targeted to equal one-quarter of earnings (up to a maximum earnings limit each year.) Effective this year, the limits will start to increase so that the 25% threshold is increased to 33.3%.
Phase 1 – The first phase is an increase in deductions. From 2019 to 2023, the contribution rate for employees will increase by one percentage point from 4.95% to 5.95%. The rate for self-employed individuals will increase to 11.9%.
Phase 2 – Starting in 2024, the annual maximum pensionable earning will increase so that it will be 14% higher by 2025. The higher contributions introduced in phase 1, will be applied to a higher base.
Impact on CPP Disability Pension – The amounts will be increased commencing in 2019. The increase received will depend on how much and for how long you contribute to the enhanced CPP. If you began receiving your CPP disability pension before 2019, it would not be affected by the enhancement.
Impact on CPP Survivor’s Pension – It will increase in 2019, but only for those individuals that start receiving the payments after January 1, 2019
Individuals will be first able to receive the maximum pension under the new CPP proposals in 2065.
The downside of CPP Enhancements – For most retirees, receiving more CPP during retirement will be positive. However, there are some potential negatives to the new system:
- According to Money Sense Magazine, someone who is 55 years of age in 2019 and hopes to retire in 10 years will contribute approximately $7,400 more over that decade to get approximately $2,450 more a year in retirement.
- A number of private defined benefit pensions determine the final level of payments by combining their pension with CPP. For example, a plan may pay 60% of the individual’s average final salary, which is a combination of pension and CPP. In such cases, an increase in the CPP may result in a reduction of pension benefits. In such cases, the individual may pay increased premiums, but not receive additional benefits.
- The Guaranteed Income Supplement is income based. An increase from the CPP may result in a corresponding reduction in the supplement for low-income retirees.
- Self-employed individuals are required to contribute 11.9% of their income in the system. In other words, the government takes the money, invests it over their working years and then returns the funds in form of a pension. It may or may not be a greater amount than the individual would have earned if they were not required to make these contributions. This is a disincentive for entrepreneurship.
Top Marginal Rates in 2019 for Ontario Residents
Capital Gains Eligible Dividends Other Income
26.76% 39.4% 53.53%
Some believe that a maximum tax rate in excess of 50% is offensive, but they must remember this does not include HST, municipal property taxes, gasoline taxes or carbon taxes.