Convert your RRSP to a RRIF by age 71
If you turned age 71 in 2013, you have until December 31 to make any final contributions to your RRSP before converting it into a RRIF or registered annuity.
It may be beneficial to make a one-time overcontribution to your RRSP in December before conversion if you have earned income in 2013 that will generate RRSP contribution room for 2014. While you will pay a penalty tax of 1% on the overcontribution (above the $2,000 permitted overcontribution limit) for December 2013, new RRSP room will open up on January 1, 2014 so the penalty tax will cease in January 2014. You can then choose to deduct the overcontributed amount on your 2014 (or a future year’s) return.
This may not be necessary, however, if you have a younger spouse or partner, since you can still use your contribution room after 2013 to make spousal contributions to their RRSP until the end of the year your spouse or partner turns 71.
Canada Pension Plan (CPP) Retirement Benefits
If you are between ages 60 and 64 in 2013 and are considering taking CPP pension benefits prior to age 65, you may wish to apply by December 31, 2013. If you start CPP benefits in 2013, your pension will be reduced by a “downward monthly adjustment factor” of 0.54% for each month before age 65 that you began receiving it. Starting in 2014, however, the downward monthly adjustment factor will increase to 0.56% (and will gradually continue increasing to 0.6% by 2016), thus decreasing your CPP pension.
If you start to receive CPP retirement benefits after age 65, you will receive an additional 0.7% for each month after age 65 that you begin receiving benefits, up to age 70. Retroactive benefits are available after you reach your 65th birthday but only for up to 12 months, including the month that you apply. You should, therefore, apply for benefits before the month that you turn age 71 at the very latest, to avoid missing out on payments.
Old Age Security (OAS) benefits
In July 2013, Service Canada implemented a process to automatically enroll seniors who are eligible to receive the Old Age Security pension. If you can be automatically enrolled, Service Canada will send you a notification letter the month after you turn 64. If you do not receive an automatic enrolment letter, you must apply for your Old Age Security pension.
As of July 2013, you can also choose to defer your OAS pension by up to 60 months beyond the date on which you become eligible. Your monthly OAS pension payments will be increased by 0.6% for every month that you delay receiving the pension beyond age 65, to a maximum of 36% at age 70. You will not be eligible CIBC 2013 Year End Tax Tips – November 2013 5
to receive OAS benefits, such as the Guaranteed Income Supplement, Allowance and Allowance for the Survivor, until your OAS pension begins and these benefits will not be increased as a result of the deferral.
Effective March 1, 2013, if you have been receiving the OAS pension for less than six months, you can cancel the pension and defer the start date to receive a higher amount, although you will be required to repay any OAS pension and related benefits that you have already received.
You can also request payment of OAS pension to which you were entitled but that you did not receive. Pension payments will only be made retroactively for a maximum period of 12 months, including the month of application, so be sure to apply by the month in which you turn age 71 at the latest, to avoid missing pension payments.
The OAS pension is “clawed back” (reduced or eliminated) if your net income exceeds $70,954 in 2013. To minimize the clawback and maximize your OAS pension, consider the following strategies:
• Delay converting your RRSP to a RRIF (to a maximum of age 71), to avoid annual RRIF minimum withdrawals and minimize net income prior to conversion.
• Canadian dividends can accelerate OAS clawback, since 138% of eligible dividends and 125% (118% in 2014) of non-eligible dividends is included in net income due to the gross-up. Consider the composition of your non-registered investments to reduce the clawback impact, perhaps looking to half-taxable capital gains.
• Consider deferring the start of your CPP pension after you reach age 65 to reduce your annual net income and the impact of the clawback.
6. Review asset allocation
Year end is an excellent time to review the types of investments that you hold, and the accounts in which you hold them.
In non-registered accounts, Canadian dividends are still taxed more favourably than interest income due to the dividend tax credit; however, in all provinces except Alberta, the highest marginal tax rate on eligible dividends exceeds the highest marginal tax rate on capital gains. Consider whether tilting a non-registered portfolio towards investments that have the potential to earn capital gains is the right move for 2014. You should also consider the impact of any tax rate changes anticipated for future years, such as those described for B.C., New Brunswick and Ontario.
Although you have until March 3, 2014 to make RRSP contributions for the 2013 tax year, contributions made as early as possible will maximize tax-deferred growth. If you have maximized RRSP contributions in previous years, your 2013 RRSP contribution room is limited to 18% of income earned in 2012, with a maximum contribution of $23,820, less any pension adjustment.
You can withdraw funds from an RRSP without tax under the Home Buyer’s Plan (up to $25,000 for first-time home buyers) or the Lifelong Learning Plan (up to $20,000 for post-secondary education). With each plan, you must repay the funds in future annual instalments, based on the year in which funds were withdrawn. If you are contemplating withdrawing RRSP funds under one of these plans, you can delay repayment by one year if you withdraw funds early in 2014, rather than late in 2013.
There is no deadline for making a TFSA contribution. If you have been over age 18 and resident in Canada since at least 2009, you can contribute up to $25,500 to a TFSA in 2013 if you haven’t previously contributed to a TFSA.
If you withdraw funds from a TFSA, an equivalent amount of TFSA contribution room will be reinstated in the following calendar year, assuming the withdrawal was not to correct an overcontribution. But be careful, because if you withdraw funds from a TFSA and then re-contribute in the same year without having the necessary contribution room, overcontribution penalties can result. If you wish to transfer funds or securities from one TFSA to another, you should do so by way of a direct transfer rather than a withdrawal and recontribution to avoid an overcontribution problem.
If you are planning a TFSA withdrawal in early 2014, consider withdrawing the funds by December 31, 2013,