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Reaping The Most From Public Pensions

There are two things to know about your public pensions:

• Old Age Security: This begins at age 65; you'll want to apply for it a couple of months before that. The big issue is to avoid the OAS Clawback, which happens when your net income on the tax return exceeds approximately $66,000. Those who are age 65 will also qualify for an Age Credit on the tax return. Speak to your tax advisor about avoiding clawbacks of this amount too, which begins when income is just over $32,000.
• Canada Pension Plan: There are several planning issues here, the main one being, do I take it early? Yes, generally that's to your advantage when you factor in that you'll have use of the money sooner, and you won't be paying premiums to the plan.

In addition, benefits can be split with your spouse. That's good planning, too. You can start taking this pension at age 60, but to qualify you have to stop receiving actively earned income that exceeds the maximum CPP pension amount for two months. Once you've met that criteria, you can resume your employment or work activities as usual.

Investment Income Planning

With the exception of withdrawals from the Tax-Free Savings Account, tapping into income from non-registered investments requires tax reporting. So you'll want to avoid this and use other methods of funding your needs. The following summary provides a review of income and assets available for retirement income planning, together with comments on their tax-efficiency rating:

• GIC/Bond interest: Not tax-efficient, 100% of accrued earnings are added to income. This means that even if you don't receive the money from a compounding investment, taxes must be paid on what is accrued.
• Dividends from preferred and common shareholdings: This income source can be extremely tax-efficient, depending on where you live and can even offset other income of the year. However, be careful; an overweighting in dividend income can cause a clawback of Old Age Security benefits. Benefits also differ if the shares are from public or private corporations.
• Accrued value in income-producing assets: Very tax-efficient, as those gains will not be taxed until disposition. Then only 50% of the gain is taxable.
• Prescribed annuities and income trust income: This income can be tax-efficient as it is made up of a combination of tax paid capital and earnings.
• Mutual fund distributions: Regular distributions from the fund: capital gains, interest and dividends have a variety of tax consequences. Generally you'll want to buy these investments at the beginning rather than the end of the year to avoid receiving all the distributions over a short ownership period. You will also want to inquire about corporate class funds for better tax-efficiency.
• Mutual fund T-SWP structures: A scheduled withdrawal may be arranged to some tax-efficiency.