Guaranteed Income Supplement (GIS) and GIS Clawback
I received an email from a senior reader (married) recently who was wondering what he can do about avoiding the GIS clawback as he was soon due to convert his RRSP to an RRIF thus a forced withdrawal.
Before we get into the question, lets start with the basics.
What is Guaranteed Income Supplement (GIS)?
GIS is a non taxable benefit for low income seniors which basically tops up Old Age Security (OAS). The maximum GIS benefit is approximately $7,800 per year, which combined with OAS (max $6,200/year) is around $14,000 per year.
In addition to the extra cash, there are other benefits as well like drug coverage.
Eligibility
To be eligible for GIS, the senior must qualify for OAS and meet the income requirements. Note that old age security does not count towards income when calculating the GIS threshold.
What’s counted as income (from govt)?
- Canada Pension Plan or Québec Pension Plan benefits
- private pension income and superannuation
- foreign pension income
- RRSPs that you cashed
- Employment Insurance benefits
- interest on any savings
- any capital gains or dividends
- income from any rental properties
- any employment income
- income from other sources such as workers’ compensation payments, alimony, etc.
Income criteria for eligibility for GIS (from govt site):
- If single, income for previous year must be less than $15,672
- If couple with one not receiving OAS, income from previous year must be less than $37,584
- If couple with both receiving OAS, income from previous year must be less than $20,688
What is the GIS Clawback?
Once the senior starts bringing in income, Guaranteed Income Supplement is clawed back at $0.50 for every $1 of income. It will continue to be clawed back until the maximum income threshold is met as indicated above.
So in the case of my reader question, once his RRSP is converted to an RRIF he will be forced into a regular (and increasing) withdrawal schedule which will be counted as income against his GIS benefits. When the reader turns 71, 7.38% of his RRIF will be withdrawn as income. If he has a $50,000 RRSP, $3,690 will be added as income which will reduce his annual GIS benefits by $1,845 (in addition to regular income tax).
With regards to reducing the GIS clawback, if the reader has a younger spouse, he can base the RRIF withdrawal rate based on the age of younger spouse. That way, he can remain at the lowest withdrawal rate for a bit longer, thus delaying taxation.
15 Comments, Comment or Ping
1. cannon_fodder
I believe this is why proponents of annuities will say this offers an advantage. Since you can buy an annuity that includes return of capital, this portion will NOT count towards income thus be free from GIS clawback.
It might also be prudent that if the person is forced into withdrawals that exceed required income that s/he place that excess into a TFSA. That way, when the RRIF is exhausted they can withdraw money from the TFSA that also would not be counted towards income.
Perhaps it would be helpful to run scenarios where some of the RRSP is used to purchase an annuity with the remainder converting to a RRIF.
I would be interested to hear how much the government pays out in GIS benefits vs. OAS vs. CPP on an annual basis. We keep hearing the CPP is well funded – I wonder if the government has to scale back payments from the GIS or OAS which gets hit first and hardest.
Aug 10th, 2009 @ 9:53 am
2. Ms Save Money
What would be the equivalent of GIS in the U.S?
Aug 10th, 2009 @ 4:15 pm
3. canucktuary
cannon_fodder: I believe GIS & OAS are funding 100% on a pay as you go basis. In my opinion, these programs will be the first to be cut once the boomers start to retire…so don’t count on these programs being there in the same format forever.
ms save money: I don’t think there is an equivalent in the US as this is one of the more socialist programs that the canadian government offers.
Aug 10th, 2009 @ 7:17 pm
4. Chet Kwapisinski
“Eligibility To be eligible for GIS, the senior must qualify for OAS and meet the income requirements. Note that old age security does not count towards income when calculating the GIS threshold.” Neither the OAS or GIS is used in determining both eligibilty and threshold amounts for GIS.
There are 3 categories of individuals in our society that are eligible to receive supplements.
1) Canadian residents who are 65 or older and who meet the residence requirements
2) The Allowance is also available to 60 to 64 year-old low-income spouses or common-law partners of OAS pensioners who receive the GIS.
3) The Allowance is available to survivors of low-income widowed spouses or common-law partners between the ages of 60 and 64.
Follow the following CRA sites to get a feel of what is available, under what circumstances and use the calculators to determine specific amounts taht are available on an annual basis. Remember that the calculations are return annual nd rest in July of the current year based on the previous year’s income.
http://www.servicecanada.gc.ca/eng/isp/oas/tabrates/tabmain.shtml
http://www.servicecanada.gc.ca/eng/isp/oas/oasrates.shtml
To take advantage of the benefits available and how to maximize and determine an approach for individuals to “take advantage” (if I can call low income individuals taking advantage) requires individual attention and calculations.
In the above scenario where there RRIF or RRSP income, one should consider a complete withdrawal or a staged withdrawal of the funds to position oneself to be eligible. Especially now with a TFSA of 5K/individual a rollover of withdrawals can be advantageous since they are tax exempt. It is not unusual for some seniors to take a one time hit and meltdown their RRSPs/RRIFs in one year and then start to qualify for the tax free GIS supplement in the following year.
As was pointed also there are other potential benefits for qualifiers as in BC most will quailfy for MSP premium (equivalent to OHIP – Ontario) assistance as well as very low deductibles and minimal fees for drugs (Pharmacare).
“canucktuary”
If you do not qualify for GIS because of age or circumstance, in our society you would still eligible for social assistance (we used to call it welfare). Every province provides for it. If an individual receiving social assistance turns 65… guess what … he no longer receives it and now is eligible for GIS.
Someone will have to pay for it either provincially or federally as that is what separates our taxation system from others. I do not believe for one moment that in an enlighten society that we would ever abandon those who need our assistance. That is where some of our tax dollars go….
Cheers
Aug 10th, 2009 @ 8:10 pm
5. Chet Kwapisinski
Sorry for the errors, the sentence above should read….
“Remember that the calculations are done annually and reset in July of the current year based on the previous year’s income.”
Aug 10th, 2009 @ 8:13 pm
6. JJ
Well, well, well, it seems that there is a clawback because you have too much income to qualify. I would be saying Thank God. I don’t qualify because I have too much $$ coming in. Guaranteed Income Supplement is for those that DO NOT have $$.
Perhaps I am missing something??
Aug 10th, 2009 @ 10:52 pm
7. Chet Kwapisinski
JJ — it is for those with low incomes in our society irrespective of circumstances. Think of it just like the Child Tax Benefit, UCCB as well as GST rebates for families that qualify based on net individual or family income.
Aug 10th, 2009 @ 11:11 pm
8. Lender
Can’t you argue that this increase in income is temporary and prevent the clawback from occurring?
Aug 11th, 2009 @ 4:11 am
9. JJ
Hi Chet,
Thanks, you make the point exactly. That is why I receive peanuts each month as Child Tax Benefit because of the income I claimed from the year before. I don’t worry that I am not receiving more from the Govt in this aspect because I made a lot more monthly to begin with.
Aug 11th, 2009 @ 4:57 am
10. Chet Kwapisinski
“Lender” — you can discuss or argue; however, the legislation prohibits them from any changes – would require a statue change by parliament. Although the OAS organization has accommodated an adjustment if one of GIS qualified seniors enters a nursing home and the GIS can be increased by them recognizing “an involuntary separation” but not the CRA for obvious reasons.
Aug 11th, 2009 @ 1:39 pm
11. cannon_fodder
canucktuary,
That is why I wonder what the total benefit payouts are between GIS and OAS. Would they reduce OAS benefits first (which probably would affect more people) to try to ensure that the most needy (i.e. GIS recipients) are less likely to be impacted, OR would they reduce the GIS benefits first because there is greater likelihood that more voters would revolt?
Perhaps there will be a movement to lower the limit where the OAS clawback begins. It does seem incredible that an individual could make more almost $65k before the OAS payments will diminish.
I’d like to see them adopt a similar structure to the CPP – if you want to take OAS early, you can but you also have the benefits reduced accordingly. It might actually save the government money to do that since, if I remember correctly, they project that you are better to wait to collect the CPP if you believe you will live to 78.
With the average life expectancy getting into the low 80’s (and increasing) if the government can encourage people to take less money earlier it would seem that over the long haul they will actually reduce their liabilities.
Aug 11th, 2009 @ 11:15 pm
12. Chet Kwapisinski
The following article highlights the proposed changes to the CPP. The opportuntity to provide input to the budgetary process ended on 07/31/09:
http://www.winnipegfreepress.com/business/modernizing-cpp-main-goal-of-proposals-49837372.html
The discussion regarding OAS should consider what requirements exist to get OAS ie) time period of residence as well as credit for living in a treaty based country etc…. not every senior in this country is eligible for the full amount of OAS.
In addition OAS is a non-contributory program unlike CPP.
The last time I checked and researched, I found no indication that I would live to 78 or that my circumstances and health would guarantee that I would enjoy the monies in the twilight of my life.
CPP@60…
Cheers
Aug 12th, 2009 @ 10:02 pm
13. Ed Rempel
Hi FT,
Good arictle. This is a huge planning issue for seniors. It essentially means that the first $10,000 they make is taxed at 50% and the next $11,000 (income $10K-21K) is taxed at a whopping 71%! This includes income tax plus the GIS clawback.
This is the highest tax brackt in Canada and it is charged not to those making huge incomes, but to seniors making less than $21,000/year.
There is a logic, however, since we want the government to help these low income seniors, but not if they don’t need it.
This is why the TFSA is better than the RRSP for those that will be in this income level. Perhaps withdrawing the entire RRSP in one shot and then investing non-RRSP in tax-efficient investments. These people must avoid dividdend stocks, since the clawback is on the grossed-up income.
There are all kinds of tax planning options, but it is more benefical for these seniors to do tax planning those under 65 with very high incomes.
Ed
Aug 23rd, 2009 @ 6:13 pm
14. cannon_fodder
Well, I stumbled upon what the government projects will be the expenditures in the 2009/2010 fiscal year for the following:
CPP – $30.744 billion
OAS – $27.578 billion
GIS – $8.080 billion
Allowance – $552 million
Found here http://www.hrsdc.gc.ca/eng/isp/statistics/rates/julsep09.shtml#topic4
Aug 24th, 2009 @ 11:47 pm
15. cannon_fodder
I’d also like to point out that the government does allow you to earn $3,500 of employment income before that is counted against your GIS clawback. That helps a little for those people who want a part time job to keep them busy and still believe they should keep most of it.
Sep 1st, 2009 @ 4:41 pm
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