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Important Tax and Other Tips and Traps for Seniors

 Review these questions and if you have “yes” answers, see the following information for further actions that may be required, some of which will avoid penalties and others to save you taxes.

Seek individual professional advice, where necessary, because the rules are complex and changing frequently.  I accept no liability based on reliance of the information below because of too many personal and/or other limiting factors affecting your personal situation.  You should seek professional advice from your own legal and financial professional advisors before relying or taking action on any of these issues because CRA interpretations or legislation may have changed, or my interpretation may differ from your own advisor.

(Also see my article titled “Personal Real Estate Tips and Traps – Taxes and Ownership Issues”)

1          Do you have a bank account, investment account or a GIC/ term deposit that held $50,000 or more at any time in the year that is set up jointly or in trust for a child or grandchild?

If a Yes Answer: Starting in 2023, if financial assets are being held in trust for another person, and the account balance was $50,000 or higher at anytime during the year, you likely have an obligation to file a T3 Trust Income Tax and Information Return.  If not filed, the penalty will be equal to $25 for each day of delinquency, with a minimum penalty of $100 and a maximum penalty of $2,500.  Additional penalties apply for negligence if the return was knowingly not filed.  As noted above, seek individual professional advice for this and all yes answers below. See the CRA web site – https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/budget-2018-equality-growth-strong-middle-class/reporting-requirements-trusts.html

2          Do you have a bank account in joint name with a child?

If a Yes Answer:  Do you want that child to have the balance of that account at any time they need it, as well as when you die?  If yes, and you have other children who are not listed on that joint account, you should have clear documentation that you only want the child whose name is on the account to receive it upon your death.  You should obtain legal advice on how to prepare appropriate documentation.

If you have set up the joint account for your own convenience, such as to allow someone to help you do your own banking, pay bills, etc., you should use a Power of Attorney for this purpose, not a joint account.  With a joint owner on your bank account, you have placed your money at risk.  What if your child gets into financial trouble and enters bankruptcy; is sued; develops an addiction and needs money; is subjected to a scam; or desperately needs money for some other purpose?  You may lose half or all of your money.  Consider changes to protect your money; use of a Power of Attorney would be a better approach.  This is especially so if you want the money shared by all of your children, and to avoid family disputes or legal challenges after you die.

3          Do you hold any assets in your name “in trust” for anyone?

If a Yes Answer: The government introduced new reporting rules starting in 2023 for assets being held in trust for another person.  Also see my answer to1 above and my article titled “Personal Real Estate Tips and Traps – Taxes and Ownership Issues” regarding real estate held in trust and/or joint ownership.  If one of a few exceptions do not apply (such as financial accounts with balances under $50,000, and bare trusts), you may have an obligation to file a T3 Trust Income Tax and Information Return.  See the CRA website here: https://www.canada.ca/en/revenue-agency/services/tax/trust-administrators/t3-return/new-trust-reporting-requirements-t3-filed-tax-years-ending-december-2023.html .  On this website, CRA defines a “bare trust” as one where the trustee holds title to the property but has no rights to make decisions regarding the property, thereby being an “agent” only.  They say, “A trustee can reasonably be considered to act as agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee’s only function is to hold legal title to the property. In order for the trustee to be considered as the agent for all the beneficiaries of a trust, it would generally be necessary for the trust to consult and take instructions from each and every beneficiary with respect to all dealings with all of the trust property.”  Hopefully, this explanation will help you determine whether you need to file a trust tax return. Professional advice is recommended.

4          Has your financial advisor recommended that you take money out of your RRSP sooner than when you really need it or to take more than the minimum amount from your RRIF?

4(i)      If Yes, were you shown a financial projection proving it was the best option based on a variety of assumptions for investment rates, life expectancies, tax rates, etc.?

If a Yes Answer: A research study was conducted by Doug Chandler, FSA, FCIA, on behalf of the FP Canada Research Foundation™ titled “Retirement Drawdown and Choices – RRIF, TFSA and Non-Registered Accounts”, in October 2022.  The study concluded that an in-depth analysis should be prepared by financial planners before making a recommendation for early withdrawals from an RRSP.  One of the quotes from the study states, “Once the full complexity of investment risks, longevity risks and Canada’s morass of taxes, credits and income-tested benefits for seniors was taken into account, this research concluded that simple, single-scenario projections of the value of a drawdown strategy are unreliable and misleading.”  This “yes” answer requires no further action, but only if you received a financial projection that showed you many possible scenarios, which is often not the case.  Furthermore, the assumptions that were used should start with reasonable figures, and then be adjusted up and down to see the resulting impact.  What are reasonable starting figures? I suggest using those recommended by the Financial Planning Standards Council of Canada that are issued annually to Certified Financial Planner designation holders.  See pages 18 and 19 on this web document: https://www.fpcanada.ca/docs/default-source/standards/2024-pag—english.pdf    See the article on my website discussing the consideration of appropriate timing for RRSP and RRIF withdrawals: https://www.corkumfinancial.ca/rrsp-and-rrif-withdrawal-timing-considerations/

4(ii)       Also, if Yes, have you taken a loan in conjunction with taking money from your RRSP (or for any other investment purposes)?

If a Yes Answer: Borrowing money to invest in the stock market is a very risky practice, and best left to the wealthy – meaning, do not do it unless you can afford to repay the loan without using the income or principal from the investments you bought with the borrowed money.  Did you borrow money without the risks being explained to you? Were you presented with a sales presentation showing that this loan would reduce your income taxes on your RRSP withdrawals, and make you wealthier because you took the money out of your RRSP early?  If so, I suggest you ensure you got the whole story.  You should have been shown three projections – one of doing nothing but taking the minimum out of your RRSP when you need to take it; a second of borrowing money and drawing down the RRSP, and a third (often not shown) of borrowing money and leaving the money in your RRSP.  My experience is that if the same assumptions are used in each scenario, the third alternative will usually show you wealthier by keeping the money in your RRSP.  Finally, you should have been shown the same three projections again using a variety of assumptions, with different rates of return, inflation rates and life expectancies to ensure the answer is the same in the majority of situations. (See 4(i)) Of course, with low or negative investment returns, both alternatives two and three will show you much poorer.  Please read my article on my website https://www.corkumfinancial.ca/leveraging-should-you-borrow-money-to-invest/  and get a second opinion if you are still doing this.  Also see my answer to the previous question.

5          If you have a child born in 1958 or later and you are receiving CPP,  are you are unsure if you applied for the Child Rearing Dropout provision when filling out your CPP application?  (Answer yes if you are unsure or know that you did not apply for it.)

If a Yes Answer:  The Child Rearing Dropout provision enables Service Canada to remove any low income years from the calculation of your average earnings for the period that your children were under age 7.  Removal of low income years results in higher average earnings and a higher CPP pension, unless you are already at the maximum.  If this provision was not claimed by a deceased spouse, it may also increase your survivor pension.  CPP applicants often miss checking the box that indicates they wish to have this provision applied, and you may be entitled to a retroactive payment if the situation applies to you.  See this web site from more information – https://www.canada.ca/en/services/benefits/publicpensions/cpp/child-rearing.html .  Contact Service Canada to verify whether you had applied or not.

6          Are you a widow(er) from age 60 to 64 with an income of less than $29,112 in 2024 (before counting Old Age Security)(the amounts change by inflation each year);

Have you have been widowed in the past;

Would your late spouse now be age 65 or older; and

You are not receiving an Allowance under the Guaranteed Income Supplement program.

If a Yes Answer to all of the above:  At a recent seminar, Service Canada personnel indicated that widowed individuals often do not realize their entitlement to an allowance at age 60, particularly if they were widowed at a young age and also perhaps remarried subsequently.  While the applicability may be limited because of the low income threshold, you or someone you know may have an entitlement.  For information about the Guaranteed Income Supplement and related Allowance, see this web site: https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/guaranteed-income-supplement.html .  Also see the description on this web site about how to calculate your income for this purpose.

7          Have you ever worked in a foreign country?

If a Yes Answer:  Have you checked to see if you may be entitled to a work pension or social security pension from that country?  Perhaps you have additional retirement income to which you are entitled?

8          Do you pay rent for your home or apartment in Canada to someone who lives outside of Canada, i.e., is your landlord a non-resident of Canada?

If a Yes Answer:  A Canadian who pays rent to a non-resident has a legal requirement to withhold income taxes from their rent and pay it directly to the Canada Revenue Agency.  This liability exists even if a tenant is unaware that their landlord lives outside of Canada, so reasonable inquiry of the landlord’s residency is important.  See the CRA website(which is for landlords, but it explains the tenant’s requirements) for more information- https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/rental-income-non-resident-tax/filing-reporting-requirements.html

 

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum