Using the current 2010 tax package for actual numbers, the age amount (line 301) is 6446 maximum, reduced by 15% of income over 32506. This clawback will occur over 6446/15%=42973.3 income, so it applies to people between 32506-75749.3 income.

However, if you look at Schedule 1 (Federal tax), line 301 is in the section Federal non-refundable tax credits, which means it does not reduce your tax bill dollar-for-dollar: it gets multiplied by the 15% nonrefundable rate at line 338. So the marginal clawback rate due to the age amount is 15%x15% or just 2.25%.

Concrete example, ignoring anything but the basic and age credits:
Line 260 (taxable income): 40000 | 40001
Line 300 (basic credit amount): 10382 | 10382
Line 301 (age amount): 5321.9 | 5321.75
Line 335 (total amount): 15703.9 | 15703.75
Line 350 (total tax credits): 2355.585 | 2355.5625
S1 Line 36 (federal tax): 6000 | 6000.15
Line 406 (net federal tax): 3644.415 | 3644.5875

Therefore the marginal federal tax rate at 40000 income is (3644.5875-3644.415)/1=0.1725/1=17.25%, which is exactly the 15% federal tax rate (bracket goes up to 40970 now) + 2.25% age amount clawback.

This drastically changes the TFSA landscape, as 2.25% is a negligible amount. The net effect is at the mid-income range (well, until the OAS clawback hits), you will be at a lower post-retirement marginal tax rate if you don’t cross into the same tax bracket as you were at pre-retirement.

The federal brackets as of 2010 are 15% to 40970, 22% to 81941, 26% to 127021, 29% thereafter. Since the OAS clawback probably hits before 81941, as long as you were working at a 26%+ bracket, post-retirement rate is lower right up to the OAS clawback start. If you were working at the 22% bracket, you can go all the way through the 15% to 40970 and your rate will be lower post-retirement.

PS: for all the people who have a problem equating a benefit clawback with a tax, think of it as not optimizing your ‘tax rate’, but ‘total amount of money in your pocket after all government economic laws are taken into account’. Then your ‘marginal tax rate’ is ‘total difference in money due to government economic laws divided by (a small) difference in income’.

Looking at it this way, from 40000 to 40001 income (ignore OAS), you go from 36355.585 to 36536.4125 in your pocket after you take into account the government economic laws. You have therefore lost 17.25 cents of your next dollar, to what we lump into ‘tax’. And that is all that matters.

Then Showtime, once you have lost all the GIS to clawback, on your *next* dollar of income you will not lose any *more* money of your GIS – you’re already completely out. Thus the *marginal* clawback rate from the GIS is zero. And a higher income person who will never care about GIS is at an *advantage* relative to a lower income person whose next dollar is ‘worth’ an extra $0.50 bill due to lost GIS.

You are of course completely correct in saying that the higher income person is better off on the whole, but 1. that’s not an apples to apples comparison and 2. it’s not what we’re talking about here. We’re taking a look at if we magically drop a dollar of income into someone’s lap, what *proportion* of that dollar can they legally keep, depending on their current total income.

Thx for the reply. I think our viewpoints differ on the concept of “free money” from gov programs and how tax is applied. When I said “100% GIS clawback”, that was basically a figure of speech to imply zero GIS. So my point was that people w/ sub-$15k income would be some GIS (ie “free money”, whether clawed back or not) vs people w/ higher income who would get zero GIS. It could be argued that having more income is better overall but I’m just saying none of it would be GIS.

I think I follow what you’re saying about investment income and gis clawbacks, ie investment income is increasing a person’s overall income so it is reducing GIS. But a higher income person doesn’t get GIS and is in a higher tax bracket, so that’s kind of 2 disadvantages. So I guess the issue is clawbacks on GIS vs no GIS at all, and lower income but more “free money” vs higher income in general but less “free money”.

The GIS clawback applies to income, excluding OAS, up to $15,888. So, for people with maximum OAS (no earnings ever are required), the clawback of 50% applies on all income up to $22,110.

This is the marginal tax rate, or the tax + clawbacks on the next dollar of income. There is no 100% clawback. Once your income is high enough that you get zero GIS, then there is no longer any clawback.

The clawback is also on taxable income. So, if the only income you have is $1,000 of investment income, you will pay no income tax, but will lose GIS as follows:

Interest: Lose $1,000 x 50% = $500 GIS
Capital gains: Lose $1,000 /2 x 50% = $250 GIS
Dividends: $1,000 x 1.44 gross-up x 50% = $720 GIS

My guestimate conclusion that TFSA is probably better for about 80% of Canadians is at: http://www.milliondollarjourney.com/tfsa-vs-rrsp-best-retirement-vehicle.htm .

I don’t have stats on how many people are affected by clawbacks or how many people are at similar or higher tax brackets after retiring than before. Therefore my 80% figure is just a guestimate based on people we have seen. We have done financial plans for thousands of families and about 300 tax returns, so we have seen quite a few, but that is not a representative group.

TFSA would be better for people that spend all or part of their tax refunds, people affected by the larger clawbacks, or people that retire in a similar or higher tax bracket to when they are working. This would include most Canadians, but I don’t know exactly how many.

Ed

Thx for the reply cannon_fodder. I follow the GIS info and it’s basically what I thought. I still don’t see how it supports the author’s rationale. The table shows a blank for gis clawblack over ~$15k (i know the exact cutoff is something more specific), so the chart could be misconsrued as a 0% clawback but it’s in fact a 100% clawback over ~$15k. How can getting nothing (ie no GIS at all) be better than getting something (ie possibly thousands in GIS, regardless of clawback)? I don’t see how the higher tax w/ clawback on investments is calculated either. I presume the clawback is affecting it in someone’s formula but the straight facts say that lower income people are applied a lower tax rate for cap gains, dividends, etc. If the 50% clawback is applied in the modified tax rate, why isn’t the 100% clawback factored in.So the facts tell me that sub-$15k income people get GIS (sometimes much more) and pay less investment tax. I don’t see how the conclusion can be made that that $15k+ people have better benefit and/or tax treatment that sub-$15k people.

Good points; a lot of those people will have built up OAS eligibility and CPP benefits.

Anyway, I respect everyone’s research and analysis. I just think it’s important to know which conclusions are irrefutable and which ones are debatable. I believe the author also stated in a diff article that TFSA is better than RSP for 80% of Cdns; I haven’t seen conclusive data that supports that either. That said, the author has many more financial qualifications than me (which is none) so maybe the info just needs to be explained more clearly and I need to understand it better.

The GIS clawback states that if you had zero taxable income (TFSA income is NOT taxable) you would receive $7,608 (or whatever the max is for that year). If you make $2, the government only gives you $7,607. Thus, whatever form that taxable income is received, you are quickly eroding the benefit of the GIS.

Now, on the other hand, if you get the GIS it would be typical to think you need it since you have so little taxable income in the first place. The TFSA in a generation or two could change all of that. Some people might build up a very sizeable TFSA and be able to live quite nicely on the TFSA income and the GIS supplement.

Oh, and just so you know – CPP and OAS are taxable income. So, how do you build up a sizeable TFSA unless you’ve been in Canada awhile? Pretty hard to do that which means you will get some OAS. And, if you are contributing to a TFSA it is also likely you worked at a job where you paid into the CPP.

I think I remember seeing how small the percentage of government retirement payouts were in the form of GIS payments. It was quite small.

According to Gov of Canada tables (http://www.servicecanada.gc.ca/eng/isp/oas/tabrates/tabmain.shtml), someone w/ an annual income of just $400 is going to get a wayyy higher GIS benefit (and combined OAS/GIS benefit) than someone w/ an income of $15k. Where does the 50% clawback come from?

From what I see about tax rates (http://www.taxtips.ca/marginaltaxrates.htm), lower income people will always pay less tax on cap gains and dividends, etc. How would people w/ less than $15k income pay more tax on investments? I presume that it has to do w/ the above clawback issue that I don’t get.

Can someone pls clarify these points for me…and explain the data sources and calculations that support the assumption that someone w/ ~$15k income is going to receive higher/better gov benefits than someone w/ very minimal income? Thx.

[...] Rempel has a great article on TFSA and seniors clawbacks for more details on the topic. If you enjoyed this article and would like to be notified when new [...]

- the income used for the GIS “clawback” does not include OAS. So income ranges should be increased by OAS amt (ie clawback doesn’t start at zero income, but at around 6000, assuming GIS recipient also gets OAS, which they should). Top income for GIS clawback needs to be adjusted by same amount for same reason.

- age amt is not a credit per se. $10,000 extra income –> 1,500 less age amt –> .15 * 1500 less federal tax credit —> $225 more federal tax. Adding a provincial tax credit of another $75 or so, and total tax went up $300. This is a marginal rate of 3%, not 15%!

[...] working. If this is true, that would be better for RRSP’s. In the introductory article about clawbacks on seniors, however, we saw that this is often not [...]

When you look at the annual income tables for combined couples, the table then gives you the monthly GIS for EACH person. Thus, if your combined annual income was $0 to $47.99 the monthly GIS for each person would be $430.90 while if the combined income was $816.00 to $863.99 the monthly GIS would be $413.90 meaning that the couple loses out an extra $17 x 2 (each person) x 12 (months) = $408 or 50% of the increase in income.

I’m not sure what you are looking at, but the clawback is 50%. Are you looking at the GIS for a couple where the difference is reduced from both of them?

Ed

http://www.hrsdc.gc.ca/en/isp/oas/tabrates/tabmain.shtml

I see that for an $816 increase in taxable income, the monthly GIS payment is reduced by $17. That would be an annual clawback of $204 which is 25% of the taxable income.

Am I missing something?