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Review of OAS and strategies to reduce impact of the OAS clawback

Old Age Security (OAS) benefits are available to anyone in Canada 65 years of age and older as long as they meet specific residence requirements. You do not need to be retired and employment history is not a factor when determining eligibility. The Old Age Security program is financed from Government of Canada general tax revenues. The maximum OAS pension is currently $546.07 per month.

For information on the eligibility requirements, visit http://www.servicecanada.gc.ca/eng/isp/oas/oasoverview.shtml.

When you are on the home page for OAS, click Find out more about the OAS changes in Budget 2012 on the right side of the page. This link provides you with changes made to the plan in 2012. One of the main changes is that the Government of Canada plans to gradually increase the age of eligibility for the OAS pension between the years 2023 and 2029, from 65 to 67. People currently receiving OAS benefits will not be affected by the changes. I was born in 1959 and thought that I would not be able to apply for the OAS pension until age 67. I was pleased to find out that I can apply at age 65 plus five months; therefore, I don’t have to wait until age 67.

Many people are concerned that once they are receiving OAS, a portion or all of their benefit might be “clawed back” if their income is too high. This clawback policy started in 1989 in order to reduce the benefit to those whose net income exceeds a specific annual threshold. In 2013 the threshold is $70,954. The annual benefit is reduced by 15% of the amount that the net income exceeds the threshold amount. For anyone whose net income exceeds $114,640 in 2013, the full amount of OAS is clawed back.

The clawback amount takes effect every July through June, taking into account the income for the previous calendar year (January through December). For example, if your net income in 2013 exceeds $114,650, your entire OAS benefit will be clawed back effective July 2014 to June 2015 (you will not receive an OAS benefit for one year). At the end of 2014, your net income will be reassessed which will determine your OAS benefit staring in July 2015.

It is important to consider all your income sources as you approach age 65. For example, if you are collecting OAS, CPP ($1012.50 is the maximum), a company pension of $25,000, have an RRIF of $200,000, and a non-registered account of $100,000, you would need to total these amounts:

OAS 546.07 x 12 months 6,552.84
CPP 1012.509 x 12 months 12,150.00
Company Pension

25,000.00
RRIF (based on a 5% withdrawal)

10,000.00
Non Registered Income (based on a 3% return if invested in GICs)

3,000.00

Your total income would be $56,702.84, which is starting to get close to the clawback threshold.

The following are some strategies to reduce your net income and the impact of the OAS clawback:

  • When to start your RRIF. Delay the conversion of your RRSP to a RRIF or annuity until age 71 to keep your net income as low as possible, as long as possible. There will be a minimum amount that will have to be withdrawn from an RRIF as soon as it is set up and the annuity will produce a monthly payment. Either of these coupled with OAS, CPP, and other pensions may push your net income over the clawback threshold.
  • Age of spouse RRIF. When opening an RRIF, base the withdrawal schedule on the age of the younger spouse. This will reduce the minimum amount that will have to be withdrawn each year, therefore reducing net income.
  • RRSP withdrawals. You may wish to withdraw some RRSP funds prior to age 65, especially in a year when your taxable income is expected to be low. Any funds withdrawn from your RRSP have to be claimed as income for that year, so by withdrawing funds prior to age 65 you will reduce your net income later on. Some people may not want to withdraw any funds from their RRSP between the ages 65 to 71 in order to minimize the effects of the clawback.
  • Apply to receive CPP/QPP as soon as eligible. The standard age that most people apply for CPP/QPP is age 65. At age 65, the maximum amount that you could receive from CPP/QPP is $1012.50 per month. Everyone has the option to apply at age 60 and receive a reduced benefit. Starting in 2012 to 2016, this early pension reduction will gradually increase from 0.52% to 0.6% per month. This means that if you start receiving your CPP pension in 2016 at age 60, your pension amount will be 36% less than it would have been had you taken it at age 65. You may want to keep your CPP/QPP benefits as low as possible so that your total net income does not exceed the threshold when you reach age 65 and become eligible for OAS.
  • CPP splitting. If you have a spouse receiving a higher CPP benefit, they can apply to share their CPP/QPP benefits with a lower income spouse, which will reduce their net income.
  • Income splitting. If you are 65 or older, the higher income spouse can also report a portion of their RRIF, employer pension, or annuity in the name of the lower income spouse to reduce net income.
  • Make use of your TFSA account. Income generated in your TFSA isn’t taxable nor are withdrawals from your account.
  • GIC and bond interest. GICs and bonds pay interest which is taxed at a higher rate than capital gains and dividends, so it is wise to even out your investment income. If you have GICs in a non-registered account you may want to consider a semi-annual or annual payout rather than compounding until the end of the term. For example, if you had $200,000 in a 5 year GIC paying 3% (compounded) paying interest at the end of the term, you would have to include interest of over $30,000 in your income at the end of year five. Compare this with an annual payout of $6,000.00 for the same GIC. Some institutions offer a high rate of interest on a compounding GIC, but do your calculations first to see how much income you are going to have to report at the end of the term. Any additional percentage that you receive on compounding may result in a clawback.
  • Capital gains. You may want to trigger capital gains on cottages, rental property, and non-registered investment prior to age 65. If you are over 65 and have a capital loss to carry forward on mutual funds or stocks, you can use this to reduce capital gains claimed for that year.
  • Dividends and taxable income. In your non-registered accounts, dividends incur less tax than interest. However you must “gross up” the amount of dividends you received in a way that increases your taxable income. For example, someone earning $1,000 in dividends now reports $1,450 in income on his or her tax return. They will be able to claim a dividend tax credit, but this may not compensate for any clawback of OAS. Prior to turning age 65, review your portfolio of dividend paying stocks and calculate what the grossed up value of your dividends will be for the year you begin collecting OAS. One strategy to reduce your taxable income is to have all your dividend paying stocks invested in a joint account. Then you can claim all dividends in the name of the spouse with the lowest income. If one spouse is under the age of 65, consider having the dividend paying stocks in the name of the younger spouse that is not yet collecting OAS. As most people age, they also prefer to lower the risk in their stock portfolio by re-balancing in the direction of more bonds and GICs. Although you must include all the interest in your taxable income, you do have more control over when the interest will be paid to you by laddering the terms of your bonds and GICs.
  • Defer OAS for up to 5 years. Starting July 1, 2013, you will be able to voluntarily defer receipt of OAS for up to 5 years. You will receive an increased amount of 0.6% to your OAS pension for every month you delay receipt, up to a maximum of 36% (60 months) at age 70. For example, someone who is going to turn 65 in December 2013 and decides to delay receiving their OAS pension of the full five years (the maximum deferral period) their monthly pension amount would increase by 36% at age 70. (0.6% x 60 months)
  • Mutual fund year end capital gain distributions. Be cautious of mutual funds that have large capital gain distributions in December. You don’t have any control over how much capital gain per unit will be paid out and this gain will have to be reported in your taxable income. When choosing mutual funds, check the fund’s past distribution history.
  • Mutual fund monthly income distribution. Be aware of whether your mutual funds pay monthly income as interest, dividends or capital gains in your non-registered investment accounts. You only need to include 50% of the capital gain in your income for the year, 100% of interest income, and the grossed up amount of dividends as discussed in an earlier point. Your strategies could include having the lower income or younger spouse (under age 65) hold the mutual funds.

The majority of Canadians do not have to be concerned about the clawback. However, I would suggest that anyone approaching age 65 review their sources of income to allow themselves the opportunity to take advantage of the strategies outlined in this article to lower their taxable income.

About the author: The author has completed the Canadian Securities Course and Professional Financial Planning and has worked in investment services for about 6 years.

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Savings account investment strategy: what are laddered term deposits / GICs?

I’ve seen the term “laddering” a lot on highinterestsavings.ca but many people don’t understand what it means. Many people, if asked whether they ladder their investments, will respond with “What is laddering?”. Here’s a short explanation of laddering in the context of term deposits aka GICs.

Laddering not a special type of account, nor something that is only available to some people, nor something you have to apply for. Rather, it is a simple strategy for increasing the interest rate earned on your savings using standard GICs.

Whether you are heavily invested in stocks or whether you are ultra-conservative and won’t put your money anywhere other than a savings account at a major bank, you’ve probably put money in a GIC or thought about it. There are a couple of common concerns regarding GICs:

  • What if you don’t want to lose access to your money for an extended period of time?
  • What if interest rates rise in the future and you miss out on a better rate?

Typically, the savings account offers the lowest rate, and the longer the term of the GIC, the higher the rate. If you’re looking at a 1.5% savings account and a 1.5% 1-year GIC, especially if you think interest rates have hit rock bottom, there is probably no point to investing in the GIC. With the 1-year GIC, you would be giving up liquidity (easy access to withdraw cash) for an arguably negligible benefit (being guaranteed 1.5% for a year and being better off were the savings account rate to drop during that time). And you might look at a 5-year GIC at 2.75% and decide that it’s not worth stashing away your money for so long. You struggle to try to “time” the market; in other words, how do you know when is the right moment to put all your money in a long term deposit? So your money ends up sitting in your savings account unto forever.

Laddering attempts to address those concerns and is best illustrated with an example. Suppose you have $5,000 in savings. You can split that into 5 x $1,000, and start by opening 5 separate GICs: a 1-year, a 2-year, a 3-year, a 4-year, and a 5-year. (Another common surprise for some is that every major financial institution offers 1-year, 2-year, 3-year, 4-year, and 5-year GICs, and often shorter and/or longer terms as well.) This means that you can count on some money becoming available again every year. As each term matures, if you don’t need that money, you can invest it in another 5-year term. If you repeat this process (re-investing each $1,000 + interest amount in a new 5-year term when it matures), you will always be invested in the longest term at the highest rate.

In other words, with laddering you split your money into separate investment bundles, all with different terms and maturity dates, so that you can take advantage of higher rates without locking away all of your money. You can vary this approach in a multitude of ways, such as having 3 years as your longest term or making each bundle have unequal amounts. Also, this concept is not limited to GICs; it can be applied to other types of investments as well.

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Filing a Complaint through the Ombudsman for Banking Services and Investments (OBSI)

http://www.obsi.ca

About 4 years ago, I was unable to resolve a complaint with a financial institution. I was advised that I could take my complaint to the Ombudsman for Banking Services and Investments (OBSI)

In this article, I will explain the process that I followed to file a complaint with OBSI.

First, here is some general information about OBSI and what they do (taken from their web site):

OBSI resolves disputes between participating banking services and investment firms and their customers if they can’t solve them on their own.

We are independent and impartial, and our services are free to consumers. You must first complain to the firm involved, but if you remain unsatisfied you have a right to bring your case to us. As an alternative to the legal system, we work informally and confidentially to find a fair outcome.

If we decide that a firm has acted unfairly, made an error or given you bad advice, and you lost money as a result, we will recommend that the firm restore your financial position to where it should have been. We may also recommend other types of non-financial compensation when appropriate. If we think you have been treated fairly, or the offer you have previously received from the firm is fair, we will let you know. While we cannot order a firm to follow a recommendation, we have an excellent record of firms – and clients – accepting our suggested resolution. We will make public the name of any firm that refuses a recommendation.

The limit for our recommendations is $350,000, but many of our cases are for much smaller amounts. However, if your claim is for an amount higher than $350,000 you can voluntarily reduce it.

1. Contacting the Financial Institution With My Complaint

First, file your complaint with the financial institution and provide them with an opportunity to respond. Start with the branch, and if your complaint is unresolved, move on to the Compliance Department. Provide a written complaint that is specific about the problem and what result you expect. In my situation, the financial institution did not have an Ombudsman of their own – that would have been the alternative. You should request a response within 30 days.

If the institution does not respond within 90 days of your complaint, or if you are not satisfied with their final response, you have the option to file a complaint with OBSI. You are required to file your complaint with OBSI within 180 days after receiving the final firm / institution’s decision. In this instance, I was not satisfied with the financial institution’s response, so I decided to take my complaint to the OBSI.

2. Reviewing the OBSI Website

Before initiating your complaint with OBSI, review the following information on their site:

  • Review the case studies to get an idea of what types of complaints OBSI has handled in the past.
  • Check the list of participants to ensure the institution is listed.
  • Download, print and review the “How We Can Help You” brochure.
  • Review the FAQ.
  • Access the tab on the site “For Consumers”. This will take you to a menu where you can choose a document titled “Getting Help With Your Complaint”.
  • Review the Complaint Form. The completed form can be sent to OBSI by fax, mail, or by using the secure online application. If you choose the online application, you may still have to follow up with a cover letter and other documents by mail or fax.

3. Completing the Complaint Form

I chose to print and mail the complaint form. I sent mine Priority Post (with tracking) and included a cover letter, complaint correspondence between myself and the financial institution, and all pertinent documents/statements.

4. What to Expect from OBSI

OBSI will contact you in writing to acknowledge your complaint. In order for them to complete an initial assessment, they will provide a form for you to sign and return accepting their terms.

After the initial assessment, you will receive further correspondence letting you know whether they are going to investigate your complaint. In my case, they decided to proceed with an investigation and outlined the process and timeline. You will be required to sign additional forms to allow OBSI access to your personal information at the financial institution.

An investigator will be assigned to your case. Additional information and documentation may be requested.

After the investigator has assembled all documentation, you will be contacted with the date and time of a telephone interview.

5. The Telephone Interview

The investigator will conduct the telephone interview and take notes. It is important to schedule the time for the telephone interview when there will be no distractions. Have all your documents in front of you, some key points written down, and a pen and paper to take notes.

The investigator will also schedule and conduct a telephone interview with the financial institution and take notes.

Following the telephone interviews, the investigator may follow up with you to clarify some points.

6. OBSI’s Report

One month after the telephone interview, you will receive a very detailed written report from OBSI with the result of their findings. The same document will be copied to the financial institution.

Conclusion

In this instance OBSI did not recommend compensation in my favour.

However, I was provided with 30 days to review and comment on the report. In addition, I was given the opportunity to provide further information if I believed it might lead OBSI to a different conclusion.

I was unable to provide any new information, so the report became final and the file was closed.

Although I did not receive compensation, OBSI provided a professional, thorough, and timely investigation and offered a valuable service.

If you are unsatisfied with the outcome of the investigation, you can still pursue other avenues of resolution including arbitration, mediation, and court action.

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XE Trade review: CAD-USD online currency exchange

XE Trade is an online currency exchange service by the currency rate information site xe.com. It can be used for business and personal reasons, to exchange money between your own accounts or to send money to people in foreign countries and foreign currencies. This review is from the standpoint of a Canadian buying US dollars for personal use.

Why use XE Trade

The premise is that XE Trade would offer better rates and be more convenient than a bricks and mortar money changer, such as Vancouver Bullion Currency Exchange or Benny Lee & Co.

Regarding rates, this is true most of the time. I’ve seen XE Trade offer rates that are between 0.7 and 2.0 cents off the mid-rate listed on xe.com, with a tendency for the higher range on the weekend. This should be always better than everyday bank exchange rates and most of the time better than the other currency exchange specialists. There are no transaction fees.

The requirement to use XE Trade is that you have CAD and USD accounts, so that you can send XE Trade Canadian dollars and have XE Trade deposit US dollars directly into the relevant account. Of course, if you want US cash you’ll still have to go to your bank to withdraw the money after it was deposited. (And in the spirit of being obvious, if you’re paying USD expenses electronically, you don’t require the extra step of going to your bank.) Also, it takes a few days between initiating the transaction with XE Trade and having the US dollars back in your account.

You also have to provide XE Trade a lot of personal information in the sign up process, as detailed below. You do not have to provide any information to face-to-face money changers.

Therefore, for small transactions, it is arguable as to whether it is more convenient to use XE Trade and if not, whether it is worth the small savings. Higher volume and dollar amount transactions for business can more easily see the benefits!

Generally, however, XE Trade works about as well as can be expected by an online, third party currency exchange service. Each person’s needs and preferences will determine whether XE Trade is worth using.

Signing up

The signup process is straightforward and quick, although you have to provide a lot of information, comparable to the amount of information that is required when you are opening a new bank account. In addition to basic name, address, and other contact information, you have to state the reason for which you will be using the service.

XE Trade: signup step 1

You also have to provide 2 pieces of identification, including at least one of a passport and a driver’s license:

XE Trade: signup step 2

XE Trade: signup step 3

For Canadian residents, you also have to submit an electronic copy of a recent bank statement:

XE Trade: signup step 4

You then have to wait for your new account to be approved, although in my case this happened the same day.

Making a trade

At any time, you can get a current rate quote before making a trade. The rate is changes in real-time, although once you’ve started the process of making a trade, the rate is held for 40 seconds and locked in when you’ve placed the bid (before sending any money).

XE Trade: Quick quote

Before starting a trade you’ll want to set up your recipient bank account. This is quite simple, you just have to enter the bank information, account number, and transit number.

XE Trade: Adding a bank account

Then, you can set up the trade by entering the amount to trade, the source and destination currencies, your payment method, and the delivery method:

XE Trade: Initiate a trade step 1

XE Trade: Initiate a trade step 2

The delivery method can be a wire transfer or electronic funds transfer (EFT), both being free on the XE Trade end, and the latter being more likely to be free on the receiving bank end.

As for the payment method, you can choose “Wire” and then pay via your bank’s online bill payment service, selecting “Custom House Currency Exchange” as the payee and using your XE Trade account number.

XE Trade: Custom House Currency Exchange Payee

Timeline

The following is the timeline that it took for me to sign up with XE Trade and complete and entire exchange:

  • Day 1, morning: Registered for an account.
  • Day 1, mid-afternoon: Account was activated.
  • Day 2, morning: Submitted a trade and made a bill payment to send the money to XE Trade
  • Day 3, morning: Informed via e-mail that XE Trade had received my Canadian dollar payment and sent the US dollar equivalent.
  • Day 5, mid-day: US dollars showed up in my account, although dated Day 4, presumably due to some internal routing at the bank.
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