Seniors learning about how those single, widowed, or divorced, get caught paying more
Sharmain Donovan has been working in finance, law enforcement, and health care industries for almost 30 years. She brought that expertise to the Gordon Howard Centre on March 27, just in time for tax season, to help our local seniors learn what they can do to reduce their tax burden with her presentation The Single Senior Tax Penalty. This event was hosted by our local business and proffesional women’s group (BPW).
She started by talking about how single seniors, and in particular single women, pay more in taxes in Canada.
“I come here with some information about how we, as single women, can strategize ourselves for income tax season and how we can plan for not having to pay so much in taxes. Because if you really think about it, the Canadian tax laws are against single women,” said Donovan.
She explained that when you’re single you shoulder all of the expenses in a household but don’t get access to all of the tax breaks that couples might.
Donovan’s presentation explained how we can structure ourselves to not eliminate taxes, but be more wise about how we pay taxes, with some tips and takeaways that we can utilize today to help us lessen our taxes.
The first subject that she took on was why single people pay more in tax in Canada. According to Donovan, there are six reasons that affect single people and women in particular more.
The first is that single people cannot split income.
“Couples can use pension income splitting, which will shift up to 50 per cent of eligible income to the lower-earning household (member). It can reduce taxes between $2,000 and $6,000 per year as compared to a single person, whether you (are a) widow, divorced, or never been married, we cannot do income splitting,” said Donovan.
She then went on to explain that single people are eligible for fewer credits and deductions on their taxes because many tax credits are designed around households not individuals.
“Single older women often miss out on spousal amount, pension income splitting credit, and age amount, which is phased out, so they’re hit sooner with one income home-related costs, and shared cost versus one person paying for everything,” said Donovan.
She explained that women in particular are more likely to have taken time from their careers to raise children, which leads to lower lifetime earnings, which is reflected in lower CPP(Canadian Pension Plan) payments.
“It means it’s lower CPP, which is taxed higher, reliance on RRSPs(Registered Retirement Savings Plan) withdrawals, which are also taxable, or RRIFs(Registered Retirement Plan Income Fund), and a greater risk to old age security clawback. An old age security clawback is when you reach a certain threshold of income, then the government, even though they give you Old Age Security, they have clawed you back because you’re in a higher tax bracket. That’s another disadvantage. So, ironically, lower lifetime earnings can lead to higher taxes at retirement because you have fewer tax-efficient income sources,” said Donovan.
Her fourth point is that with all expenses of a household paid by one person and no adjustment from the tax system for this, single people may rely more on their RRSP withdrawals, which are taxable.
Donovan’s fifth reason that single people pay more is that when they become single due to their spouse dying, there can be a sudden tax shock, going from two people to one.
“When your spouse dies, your income splitting disappears, and survivor benefits are taxable. RRIFs may be transferred, increasing your taxable income, and the household goes from two people to one. The tax burden does not adjust proportionately, so many widows see their taxes jump anywhere between $3,000 to $10,000 per year after their spouse passes. That is a huge shock, and it can actually cause a lot of hardship,” she said.
Should couples divorce, the burden can similarly cause them to withdraw from RRSPs earlier, causing the same issues as the above scenarios.
“Women over 55 are disproportionately affected (by taxes) because they live longer. They are more likely to be widowed. They have lower lifetime earnings. They often carry more caregiving responsibilities, and they rely more on taxable retirement income sources. The result is a systemic tax disadvantage,” said Donovan.
Though the situation can seem bleak, she also shared her top tax-saving strategies, which can help to reduce tax burdens for single seniors.
Donovan’s first piece of advice is to claim every tax credit you are eligible for.
She advised that seniors look to see if they qualify for the age amount, pension income amount, disability tax credit, which many seniors qualify for due to mobility, chronic illness or cognitive decline, and the Canada Caregiver credit.
Some provincial credits to look out for include the Manitoba Seniors’ School Tax Rebate, Manitoba Seniors’ Benefit, and property tax credits and rent assistance, though these can vary by income and living situation.
Since senior women often have higher medical costs, Donovan drew attention to maximizing medical home-care deductions by keeping every receipt for expenses, which include home care and attendant care, mobility aids, prescription drugs, dental work, and travel for medical treatment.
Home-related senior credits are also something to look out for to maximize your ability to age in place. Some to look for are the home accessibility tax credit and the multigenerational home renovation tax credit.
Donovan then went on to discuss optimizing RRSP, RRIF and pension withdrawals.
“Some of the key strategies here are to start your RRSP withdrawals before you reach 71, because when you reach 71, it’s mandatory that you start taking them. By doing this before 71, it helps to avoid large forced RRIF withdrawals later. If you want to do some withdrawals right now, if you’re under 71, withdraw small amounts early to avoid Old Age Security clawbacks. Coordinate withdrawals with low-income years, for instance, early retirement or widowhood. These are widely recommended retirement tax-saving strategies for you to follow. One of the things that you can also do is, through your bank, you can also get an investment advisor to help you pre-retirement or just after retirement, to help you strategize,” said Donovan.
She recommends keeping up with submitting your taxes annually to the Canada Revenue Agency(CRA) so that benefits like old age security, the guaranteed income supplement and others are kept active, and also making sure to apply for these benefits. In addition, completing your taxes annually means that you can gain access to tax credits and rebates.
Another strategy that can work for those who are generous is to combine your charitable donations strategically, as donations receive a higher credit rate after the first $200.
Donovn then discussed tax-efficient investment accounts.
“Your TFSA(tax-free savings account) withdrawals are tax-free and do not affect old age security or guaranteed income supplement. Move interest-earning investments into your TFSA when possible. Your TFSA is your best friend. Whenever you’re taking out money from something that’s taxable, hide it away in your TFSA. Let it sit there. Use that TFSA as an augment to your income. Pull it out when you need it, but otherwise, leave it in your TFSA. It’s still earning interest, but that interest is not taxable. Avoid old age security clawbacks. The clawback begins when income exceeds the annual threshold. To avoid it, spread your RRIF withdrawals over many years. Use your TFSA for income, avoid large one-time withdrawals. That’s what hurts you the most,” she said.
Tangential to what she said about using your tax-efficient investment accounts, to avoid old age security clawbacks, time capital gains over multiple years, spread RRIF withdrawals over multiple years, avoid large one-time withdrawals, and use your TFSAs for income when needed.
Donovan explained that the best time to prepare is early.
“Use the golden window. This is the period before mandatory RRIF withdrawals begin at 71. Your goal is to withdraw enough to stay in a low tax bracket, but not so much that you trigger old age security clawbacks later. Why this works is that your RRIF and your RRSP withdrawals are fully taxable. If you wait until 71, the RRIF premiums can push you into a higher tax bracket. Early controlled withdrawals reduce lifetime tax. The practical approach is to start small RRSP withdrawals in your early 60s, fill up the lowest tax bracket every year and move the withdrawal funds into your TFSA, but there is a maximum to your TFSA as well,” she said.
The presentation ended with a question and answer session.
Some resources that Donovan recommends seniors check out are the Government of Canada’s website’s articles ‘Adults 65+: We’ve got tips to help you this tax season!’ and ‘Taxes when you retire or turn 65 years old’, taxbreak.ca, Blueprint Financial, and taxtool.ca’s article ‘Retirement Tax Planning’.
