Sadie has a defined benefit pension of $15,816 a year.Jimmy Jeong/The Globe and Mail
When a person dies, they are deemed to have disposed of their property at the time of death. If they are married, their assets can pass to the surviving spouse on a tax-deferred basis. Naturally, questions arise about future taxes.
So it is with Sadie, whose husband died earlier this year. She is 66 and semi-retired, with occasional work in health care.
Sadie has a defined benefit pension of $15,816 a year. She will get a Canada Pension Plan survivor’s benefit to bring her total CPP entitlement to the maximum allowable of $1,254 a month, or $15,048 a year. The market value of their combined investable assets is about $1.14-million.
Because her husband’s taxable income for 2022 was only $40,000, Sadie asks whether she can make a withdrawal from his registered retirement income fund before the end of the year to raise his taxable income and lower hers. “Would this withdrawal be credited to him or me?” Sadie asks in an e-mail. She is the beneficiary. “Should I switch his RRIF back to a registered retirement savings plan in my name?” she asks. She is concerned that her RRSP will be too big if she rolls in his RRIF. “I’d love to reduce it and pay the taxes at a slightly lower level.”
As well, Sadie is deferring property tax on her B.C. house and wonders whether she should pay it off or continue deferring. Her retirement spending target is $60,000 a year after tax.
We asked Ian Black, a fee-only financial planner at Macdonald, Shymko & Co. Ltd. in Vancouver, to look at Sadie’s situation. Mr. Black holds the registered financial planner (RFP) designation.
What the expert says
Sadie’s goal of retiring with an after-tax income of $60,000 a year is achievable, Mr. Black says. “She could actually spend more than $79,000 per year to age 97, which is 30 per cent more than her goal,” the planner says. In reality, she appears to be living on about $46,200 annually. Sadie could afford to stop working if she wants to.
Sadie wonders whether she can make a further withdrawal from her late husband’s RRIF before Dec. 31 and add it to his taxable income for 2022. In a nutshell, no. “Because she is the successor annuitant of her spouse’s RRIF, any withdrawals, including the remaining minimum RRIF amount, will be taxed in Sadie’s hands.”
While it would be possible to then split a prorated amount back to his final return, her income would still increase – not the intended goal, the planner says.
There is a way to increase her late husband’s income, Mr. Black says. “At his death, he had about $30,000 of accrued capital gains,” the planner says. Normally, Sadie could receive these assets at the adjusted cost base, thereby continuing to defer the gain. “However, she could elect out of the automatic spousal rollover and have the assets transfer to their market value, realizing the gain on his final return,” he says. In practice, this can be done on an asset-by-asset basis at the time her late husband’s return is prepared (April, 2023) and his other income fully known, Mr. Black says. The election would be filed with his return.
Sadie’s other concern is that her income will increase, or rather her income be taxed at a higher rate owing to higher income, the planner says. “I don’t see this as an issue as we project her income will remain below the Old Age Security clawback threshold during her lifetime.” Her marginal tax rate will be about 28.2 per cent.
The threshold at which OAS begins to be clawed back rises each year. For 2022 it starts at $81,761, rising to $86,912 in 2023.
In her year of death, her income will increase owing to her RRIF value being brought into income, as well as the deemed disposition of her non-registered portfolio.
Therefore, because Sadie is the successor annuitant of his RRIF, she could maintain his account and withdrawal schedule, Mr. Black says. But, he adds, often it is easier to manage one account. Sadie could roll her late husband’s RRIF back into her RRSP up until she is age 71 in five years. She could continue to withdraw the same amount he was withdrawing – about $15,000 annually.
Because Sadie has assets in excess of her needs to provide $60,000 of cash flow annually, she may consider gifting funds to her adult children now, Mr. Black says. They are her main beneficiaries. Alternatively, charitable donations could provide some tax relief. She might consider adding a charitable component to her will, which can allow for more flexibility as to where the donation credits are utilized, the planner says.
“We estimate she has about $400,000 of surplus capital today which could be gifted,” he notes. “That said, we would not suggest gifting this much now as it removes the level of safety from her finances.” The planner assumes Sadie does not sell her house in retirement, but that it forms a part of her estate. “Given the current $2.4-million value, this provides a level of safety.”
With her investment portfolio, Sadie is taking more risk than needed, the planner says. However, given her margin of safety in “excess” assets, she can afford to take additional risk and not jeopardize her standard of living. A more balanced portfolio – 60 per cent equities and 40 per cent fixed income – would have lower volatility and therefore a greater chance of success, he says. “We used a 60/40 return profile in our projections.” The forecast assumed a 6.5-per-cent rate of return on the equities, 3.5 per cent on the fixed income/cash and an inflation rate of 3 per cent.
Sadie’s portfolio is made up mostly of individual securities. The planner suggests a portfolio more broadly diversified by asset class and geography using lower-cost exchange-traded funds.
He also suggests Sadie continue to defer property taxes, calling the current interest rate of 1.7 per cent annually very favourable.
Client situation
The person: Sadie, 66
The problem: Is there any way to raise her late husband’s final tax liability? Should she roll his RRIF into her RRSP? Should she continue to defer property tax?
The plan: As beneficiary, she could consider electing out of the spousal rollover of capital gains on investments so that the gains are taken on spouse’s final return. Combine RRIF and RRSP for easier management. Consider gifting to children and moving to a balanced portfolio of exchange-traded funds.
The payoff: A clear path forward without having to worry about income tax.
Monthly net income: $4,155
Assets: Bank account $5,000; his investments $286,205; her investments $92,305; TFSAs $179,400; her RRSP $352,720; his RRIF $198,795; his life income fund $35,135; residence $2.4-million; estimated present value of her DB pension $250,000. Total: $3.8-million
Monthly outlays: Home insurance $160; electricity, heat $115; maintenance $200; garden $50; transportation $205; groceries $300; clothing $50; gifts, charity $150; vacation, travel $1,000; dining, drinks, entertainment $330; personal care $30; sports, hobbies $85; subscriptions $80; health care $60; communications $120; registered education savings plan for grandchildren $415; TFSA $500. Total: $3,850
Liabilities: Deferred property tax (B.C.) $53,500
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