by Thomas Johnson
Happy New Year! Let’s welcome in 2022 with a new sense of optimism for the year that lies ahead. To kick the year off right, start by thinking about taxes!
Income tax is likely one of the single biggest expenses you have each year. Navigating our tax code can be daunting but doing so can be greatly rewarding for your personal finances. If you want to put your best tax foot forward in 2022, start by examining:
Your 2021 Income
If you have your last paystub from 2021, now is the time to look over it in detail. How much was your gross income for the year? What deductions came from your employment (pension, group RRSP, union dues, etc…)? How much income tax was withheld? Did anything surprise you?
These details can assist you in determining whether or not an RRSP purchase, before the deadline (March 1, 2022 for the 2021 tax year), is valuable to you. These details can also give you a sense of the net income you’ve been accustomed to live on in your working years, so you can budget for retirement more sensibly!
By understanding “where you’ve been” you can get a better picture of “where you’re going.”
A Forecast for 2022
Now that you know how last year looked, let’s forecast what 2022 will hold. Are there any reasons for a material change in your income for the next 12 months? Will you be starting CPP or OAS? Do you have a pension change or variable incomes? What about a pay raise or opportunity for more/less overtime hours?
Once you have a rough idea of your income, you can predict the tax bracket you’ll fall into:
2022 Combined MB and Federal Income Tax Brackets
| 2022 Taxable Income |
Other Income Sources |
Capital Gains |
Eligible Canadian Dividends |
Non-Eligible Canadian Dividends |
| First $34,431 |
25.80% |
12.90% |
3.84% |
18.38% |
| $34,432 up to $50,197 |
27.75% |
13.88% |
6.53% |
20.63% |
| $50,198 up to $74,416 |
33.25% |
16.63% |
14.12% |
26.95% |
| $74,417 up to $100,392 |
37.90% |
18.95% |
20.53% |
32.30% |
| $100,392 up to $155,625 |
43.40% |
21.70% |
28.12% |
38.62% |
| $155,626 up to $221,708 |
46.78% |
23.39% |
32.79% |
42.51% |
| Over $221,708 |
50.40% |
25.20% |
37.78% |
46.67% |
Marginal tax rate for dividends is a % of actual dividends received (not grossed-up taxable amount).
Marginal tax rate for capital gains is a % of total capital gains (not taxable capital gains).
Gross-up rate for eligible dividends is 38%, and for non-eligible dividends is 15%.
For more information see Manitoba dividend tax credits.
If you can reasonably forecast your income in advance, you can make some tweaks to your savings or withdrawal habits to minimize the tax pain. For those near the next highest tax bracket, you may consider attempting to defer income for future years. For those with lots of wiggle room in their tax bracket, 2022 might be a year to take on additional income at a known tax rate.
Looking Beyond This Year
If you’re at or near retirement, it’s even more important to look beyond a single tax year. Minimizing taxes today is great, but not if it leads to additional tax down the road. Factors like Old Age Security clawback or large estate tax bills can be mitigated by planning ahead. If you don’t have a proper income tax forecast for your retirement, talk to your Financial Advisor!
Tax planning is arguably the single best activity for moving your retirement plans in a positive direction. But you can’t plan for what lies ahead if you don’t take the time dive into the details. If you’ve spent years “burying your head in the sand” until the filing deadline rolls around, let’s break that habit!
by Thomas Johnson
As the Holiday Season approaches, you may find yourself thinking more-and-more about giving to those in need. Dreaming of making a difference for your favourite cause(s) isn’t uncommon. What is uncommon is committing the time, energy and resources to make that difference.
Fortunately, you don’t need a surname like “Richardson” or “Asper” to make your charitable gifts go further. All you need is a little planning, done right:
Bank Your Receipts
If you’ve donated to charities in the past, you may already be familiar with the Charitable Tax Credit. The credit is CRA’s way of lessening the financial burden of donating money. This credit isn’t perfectly linear, creating a planning opportunity to maximize the tax relief.
In Manitoba, the combined federal and provincial tax credit is 25.8% on the first $200 donated in a calendar year. All amounts above $200 earn a combined 46.4%! You can also carry forward unclaimed charitable contributions up to five years.
The smart planning strategy? Consider hanging on to your charitable donation receipts and claim them in a single, bulk year rather than spread out over time. This will put more of your donations into the 46.4% credit range and reduce your out-of-pocket cost for making charitable gifts!
Gift Appreciated Assets
A unique tax planning opportunity exists in Canada for donating assets (real estate, property, stocks, mutual funds, etc…) to registered charities in kind. You can donate non-registered assets without selling them and triggering capital gains, creating a tax-free rollover with a tax credit boost!
For example, imagine John bought an investment for $1,000, many years ago. That investment is now worth $5,000 and John would have a $4,000 capital gain for cashing it in. If John is in a 50% tax bracket, he would pay 50% income tax on half of the capital gain. This sale costs him $1,000 of income tax and nets him $4,000 cash for donating to charity. Instead, if John gifts his securities to the charity in kind, the charity winds up with a $5,000 asset and John gets his charitable tax credit on a larger dollar amount! That’s an immediate 25% enhancement for both John and his favourite charity!
Look At Life Insurance
Most people think of life insurance as a risk-mitigation tool for protecting against premature death. What is often underappreciated about life insurance is the unique way it can be used for leaving a charitable legacy!
If you own or buy a permanent life insurance plan, you’ve guaranteed a particular estate benefit when you pass away. Ideally one that far exceeds the premiums paid. Depending on how you structure the policy (speak to your financial advisor), you can receive your charitable tax credits for the premiums paid, the cash value in the policy, or for the estate benefit.
Imagine someone who knows they’ll have a large final tax bill when they pass away. Rather than reserve money to pay CRA, they purchase a life insurance policy that pays a significant benefit to their favourite charity. Enough of a benefit that the tax credit offsets that tax bill! This strategy is suddenly an enormous win-win for both your personal cause and for your heirs, at the expense of CRA.
Create A Family Foundation
If you have money to burn, you could start a family trust for donating to charity. If you’re a little more fiscally conscientious, you could establish a donor-advised fund. A donor-advised fund is very similar to the large philanthropic trusts of the wealthy, but without exorbitant setup fees or ongoing legal bills.
For as little as $25,000 invested you can create your own donor-advised fund in your family’s name. You get to pick your registered charity that it supports. You get to anoint a successor to manage the donations when you’re gone. You get control over your charitable legacy!
Donating to a great cause doesn’t have to break the bank. By planning out your giving ahead-of-time, you can stretch your dollars further and make a significant impact in the lives of those who need it most!
Happy Holidays to you and you and your family!
by Thomas Johnson
What price can you put on ‘flexibility’ when it comes to your money? Being able to make contributions, take withdrawals, adjust amounts, and alter investments, are all valuable components to good retirement planning. How can you set up your investment accounts to maximize the flexibility available to you as you enter retirement?
- Use The Younger Partner’s Age for Minimums.
Whether it’s a Life Income Fund (LIF), Retirement Income Fund (RIF) or any other registered income account, there is an age-based component in calculating your annual payments. When deciding on the minimum amount you must receive each year, you have some choice. You can base the calculation on your age OR you can base the calculation on your spouse’s age if they’re younger. The younger the person, the lower that minimum amount will be which gives you greater control over your income each year!
- “Unlock” Your LIFs
A LIF is simply an account type for paying an income stream out of former pension money. Normally, there are rules that cap the amount of income you can take in a year (based on age and value of the account). If your pension falls under Manitoba legislation, you may be entitled to “unlock” some or all of your pension, enabling you to dictate exactly how much income you want in a given year. I’ve written before about the process and recent legislation for unlocking pensions.
- Avoid Locking Your Money Away
For many of my clients, locking money away has historically been the habit that enabled them to save for the future. They’ve built a pattern of buying and re-investing in Guaranteed Investment Certificates (GICs) or investment contracts with Guaranteed Withdrawal Benefits (GWBs). These products rely on the investor to leave the funds untouched, for preset periods of time, in order to avoid penalties. When you’re retiring, not being able to access certain pools of money can be very detrimental to your income strategy if not executed properly. Be sure to review your portfolio and take note of products that restrict you from taking an income!
- Watch Out for Taxes When Trading Investments
“Capital Gains” are a form of taxable income that is only triggered when certain assets are sold for more than they cost. If you own Non-Registered investments as part of your retirement portfolio, and you make trades or switches on holdings with unrealized capital gains, you can wind up triggering an unexpected tax bill! You may not have put a penny in your pocket when you switched from Investment A to Investment B, but you may have generated a tax slip that will come due in the upcoming tax season. If you’re unsure about whether your retirement portfolio has looming capital gains, consult with a professional before you execute your transactions.
Being flexible with your retirement assets is a major component to being successful in this stage of your life. The power of choice, when it comes to money, gives you the control over how you will live your life. If you take the time going into retirement to build in flexibility, you’ll never be the one to say “sorry, I’m on a fixed income!”
by Thomas Johnson
For most Manitobans, we try to avoid thinking about taxes any more than we need to. Gathering your T4s and receipts in the new year, passing them along to your accountant in a shoebox, and crossing your fingers for a refund is pretty much the norm.
Is there a better way to get a grip on your income tax situation? Can we break up the work throughout the year so it’s less onerous? Yes we can!
January/February
The window for contributing to RRSPs for a tax year is actually 60 days into the following calendar year. For 2021, you can still buy RRSPs that count for this year as late as March 1, 2022. If you’re actively contributing to RRSP accounts or thinking of making an additional deposit, use this time to make an assessment of your previous year’s income and potential tax bill. This information should inform you on how much, if any, additional RRSPs you should buy before the window closes!
January 1st also means that new Tax Free Savings Account room is available ($6,000 in 2022). If you’re topping up you TFSAs, make deposits early in the year to maximize the potential tax saving power.
The other key change every new year is for retirees. RRIF and LIF payments will likely shift thanks to the formulas that dictate their minimum and maximum amounts. Start the new year off right by forecasting your income needs and adjusting your income sources in light of your new payment schedule.
Spring Cleaning
Once May has rolled around, you’ve likely already filed your prior year’s tax return and discovered whether CRA has a refund for you or if you owe. You’ll almost certainly be receiving mail from them and should be filing it in the ‘important’ section of your filing cabinet.
One of the letters will by your Notice of Assessment, which is a great snapshot of your income tax situation. In this document, you’ll find key details like the amount you owed/received and your RRSP contribution room for the current tax year.
If you find yourself owing CRA money in consecutive years, they may also ask you to start remitting quarterly installments. Quarterly installments will be a prepayment for the current tax year, based on past history. If you have installments to make, mark the dates and amounts in your calendar to avoid late penalties and interest!
Year-End
In the latter months, you’ve likely got a good handle on your income level for the year. This information allows you to be strategic and take action on any transactions that fit your tax strategy. Capital loss harvesting, RRSP & RRIF meltdowns, or business owner compensation are all action items that need to be triggered in a specific tax year.
If you’ve got some wiggle room in your tax bracket or an ability to time out a tax bill effectively, do so at the end of the year when you have the most certainty that it’s the right action to take.
Whenever it comes to tax, ALWAYS be sure to run your strategies past your accountant for approval. Having an open line of communication and a proactive approach to your tax plans will not only make their lives easier, but will hopefully help you keep more money in your pocket each year!
by Thomas Johnson
You’ve retired! You’re finally at the stage in life where you’ve flipped “off” the savings switch and begun living off your hard-earned assets. Unfortunately, taking an income in retirement isn’t as easy as flipping a switch. There are many considerations to make, such as taxation, ordering of withdrawals, and investment strategy.
Today I’m going to dive deeper into the risks of a poor investment strategy for retirement assets and offer some tips do it better!
The Risks of “Bad Drawdowns”
What do I mean by a “bad drawdown”? Ultimately, it’s the act of selling investments at a low point in the market cycle (selling low and buying high is generally a very bad investing habit!). When you’re retired, you’re anticipating a smooth, consistent income from your investments. Every few weeks or each month, you would like funds deposited in your bank account. Stock and bond markets, however, don’t move in a straight predictable line.
Good investment practice would be to avoid selling when markets are down. But if your retirement accounts are set up to automatically sell on the same date each month, you could unknowingly be drawing on your assets on the worst day of the month or even the worst day of the year!
Example:
Let’s imagine a hypothetical year of returns on a $100,000 account that sells $1,000 each month:
| Month |
Starting Value |
Investment Return |
Amount Redeemed |
Ending Value |
| January |
$100,000 |
-4% |
$1,000 |
$95,000 |
| February |
$95,000 |
-3% |
$1,000 |
$91,150 |
| March |
$91,150 |
-6% |
$1,000 |
$84,681 |
| April |
$84,681 |
4% |
$1,000 |
$87,068 |
| May |
$87,068 |
2% |
$1,000 |
$87,810 |
| June |
$87,810 |
-1% |
$1,000 |
$85,932 |
| July |
$85,932 |
2% |
$1,000 |
$86,650 |
| August |
$86,650 |
3% |
$1,000 |
$88,250 |
| September |
$88,250 |
5% |
$1,000 |
$91,662 |
| October |
$91,662 |
-3% |
$1,000 |
$87,912 |
| November |
$87,912 |
2% |
$1,000 |
$88,671 |
| December |
$88,671 |
0% |
$1,000 |
$87,671 |
Over the course of 12 months, $12,000 has been drawn out of the account but the account is down $12,329, making it a negative returning year. Had the account been left untouched, it would have been worth $100,331 at the end of the year, making it a positive returning year. The simple act of selling throughout the year, during the down months, caused a $660 swing in investment performance. In our hypothetical scenario, that’s nearly a full month of retirement income evaporated by “bad drawdown” timing, in only a single year!
What Can I Do About It?
The good news is there are actionable steps you can take to avoid the “bad drawdown” effect. You can ultimately do one of three things:
- You can take your income stream off of autopilot. If you manually review and observe your account holdings each month, you can elect to redeem only from the ones that make sense. You may find this tedious and a considerable amount of effort; however it is technically a method for avoiding poor timing.
- You can only hold safer, lower–returning investments. An easy way to get rid of the complications of volatility is to remove it from your investments entirely. The tradeoff is you should expect lower, long-term returns from less volatile investments. Which may simply be trading one problem for another.
- You can take your income stream from your safer holdings. I’ve written before about the advantages of drawing your income from the lower volatility portions of your portfolio. If you’re only drawing from low-risk holdings and systematically selling the high-risk holdings when they’re at a profit, you can immunize your retirement from “bad drawdowns!”
Planning for, monitoring and sustaining a retirement income is always going to mean putting in some work. Going into it with some “best practices” in mind and an awareness of the pitfalls is paramount to doing things right. With a little bit of fine-tuning, you can flip your retirement switch without a worry!
Recent Comments