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The High Cost of Interest Income for Seniors
By Jeffrey Sindall, September 25, 2015
You worked hard to build your savings. How much of your interest income are you actually keeping?
Check line 121 of your tax return. This is the line on which you must report interest income received from financial institutions for your term deposits, Guaranteed Investment Certificates (GIC) and other types of savings held in “Open” accounts as reported to you in box 13 of a T5 slip each year. Interest income from mutual funds is reported in box 26 on T3 slips.
You are probably very disappointed with the interest rate you are receiving on your savings. Rates have been very low since the 2008/09 stock market crash and recession. Even worse is that all interest income received in “Open” accounts must be reported on your tax return and is fully taxable.
This brochure explains the high cost of interest income and concludes that you have an alternative choice for your savings. Dollar values are updated for the 2015 tax year.
First, let's consider that your income from Canada Pension Plan (CPP), Old Age Security (OAS), and an employment pension are fixed. You have some flexibility with your RRIF yet must withdraw an annual minimum after reaching age 71. Your interest income is considered to be received "on top of" your other income.
Fully Taxable: The tax rate payable on your interest income depends on your total taxable income. From about $45,000 to $70,000 of taxable income your combined tax rate is 31.15%, or $31.15 tax on every $100 of interest income. Above $89,401 it's 43.4%.
Reduction to Age Amount Tax Credit: Persons age 65 and older receive an Age Amount Tax Credit. Yet for net income above $35,466 this Age Amount is reduced. The net effect is an additional 3% tax cost.
Increase to Ontario Health Premium: As taxable income increases, so does your Ontario Health Premium. The premium increases in steps so it's not practical to indicate a specific rate.
For Low Income Seniors: Interest income may affect the GST Credit, reduces the Guaranteed Income Supplement, and may reduce the Ontario Tax Reduction.
Reduces the Ontario Property Tax (Rent) Credit and Sales Tax Credit: These two credits are paid together under the Ontario Trillium Benefit. Net income over a threshold reduces your Ontario Property Tax (Rent) Credit at a rate of 2% and your Ontario Sales Tax Credit at a rate of 4% until each is zero. That's 6% combined!
Ontario Senior Homeowners' Property Tax Grant (OSHPTG): This maximum $500 grant is reduced by 3.33% of net income over $35,000 for seniors who are not married (or living common-law) or over $45,000 combined net income for seniors who are married (or living common-law).
Old Age Security Repayment: For each senior with net income greater than $72,809 the OAS is reduced by 15% until zero. The after-tax impact is from about 7% to 10% of taxable income, or a cost of about $7 to $10 on every $100 of interest income. If 2015 taxable income is greater than $89,401, the combined federal tax, Ontario tax with surtax, and OAS repayment is about 51% (and all other credits and benefits are already zero).
It would be incorrect to sum all these tax costs because not all of them would be applicable to any one person. However, several occur in the range of $35,000 to $50,000 net income. Jeffrey Sindall can review your tax return and determine exactly the high cost of your interest income.
Today's low GIC interest rates and the high cost of receiving fully taxable interest income mean that anyone holding GIC savings in an “Open” account is losing purchasing power compared to inflation. This is an awful situation.
Worse still, to get the best GIC rate you must lock up your money for five years which is not appropriate for most seniors.
You have an alternative choice.
Interest income is just one of four types of income from savings and investments held in Open accounts. The other three types receive preferential tax treatment. For your savings outside of TFSA and RRIF accounts, wouldn't you rather pay tax at half the rate and only when you withdraw money for spending?
If you 1) have more than $50,000 to invest, 2) would be comfortable with a low risk investment in a mix of Canadian government bonds, provincial bonds, and Canadian corporation bonds, and 3) have a time horizon of more than three years, then you should allow Jeffrey Sindall to review your personal situation and make a recommendation. You will always have access to your money without any being locked up.
Jeffrey Sindall is a Financial Advisor and owner of Abbington Investments in Hamilton, Ontario.