COUPLE WORTH $ 10M BUT PAY $ 0 INCOME TAX
We are all hearing the calls to tax the rich. The assumption being, if you are rich, you will pay a lot of tax — but is that always true?
Here is an example of a couple with a net worth of $ 10 million who are set up to pay exactly $ 0 in tax in 2015.
Tom and Mary are a recently retired, 65- year- old couple, living in Vancouver. It isn’t the only part of Canada where a $ 0 income tax bill is possible, though — the dream is alive in Alberta, Saskatchewan and the Territories, too. In Ontario, they would have no tax, but would pay $ 1,500 for the health premium, which is essentially a tax.
In West Vancouver, they live in a $ 3 million home, which they bought 20 years ago for $ 400,000. They also have a $ 1.4- million cottage near Whistler, B. C., and a $ 600,000 house not far from Phoenix, Ariz.
On their $ 5 million of real estate assets, they do pay property taxes, but no income taxes.
Tom is a retired lawyer and Mary is a retired accountant. Despite being tempted over the past few years, neither decided to set up a corporation. They wanted to keep things simple. As a result, their $ 5 million of investments looks like this:
$ 4 million in a joint non- registered investment account: This account primarily holds stocks, roughly two- thirds of which is Canadian stock. They don’t aim to have very high dividends on the account, but they still end up with a dividend yield of about 3.75 per cent. This is expected to translate into $ 50,000 of Canadian dividends and $ 25,000 of foreign dividends for each of them.
$ 100,000 combined in their TFSAs and $ 900,000 combined in their RRSPs.
To balance out some of their investment risk, they have most of their TFSAs and RRSPs in bonds, preferred shares and private mortgage funds. They have decided not to draw any money from their RRSP, to instead set up a RRIF account and then moved $ 3,000 each to the RRIF. They then withdrew $ 2,000 each from the RRIF. The reason they did this was to take advantage of the $ 2,000 Pension Tax Credit. They can’t withdraw it tax- free, but they can withdraw the first $ 2,000 at a significantly reduced tax rate, and they want to draw RRSP/ RRIF money whenever they can, at a low tax rate.
Because Tom and Mary are now 65, they have an option to take Canada Pension Plan and Old Age Security. They have decided to defer the CPP, but take the OAS and see how much might be clawed back.
Tom and Mary work with an investment counsellor who charges a one per cent fee on their investment assets. Of this fee, the amount that covers the taxable account is fully taxdeductible. As a result, they can each deduct the $ 20,000 of investment counselling fees from their taxes. They also receive some tax related and planning advice from the investment counsellor.
Tom and Mary believe in giving to charity, and as their wealth has grown, so has their charitable giving. This year, they plan to give a total of $ 34,200 to various charities. While this seems like a lot of money, it represents 0.34 per cent of their net worth.
So where does this leave the $ 10- million couple when it comes to tax time?
The good news is that they pay a grand total of $ 0 in income taxes.
The sort of bad news: They each get $ 4,800 of their $ 6,800 OAS clawed back, but they still get a total of $ 4,000 from OAS after tax.
Now, before you protest in front of their home, it is worth keeping a few things in mind.
Tom and Mary have paid a lot of taxes in their working years.
In addition, just because Tom and Mary are paying $ 0 in income taxes in 2015 doesn’t mean that they will be able to do this for too much longer. They have several tax issues coming up in the years ahead.
These include their $ 900,000 of combined RRSPs, which they will need to begin drawing down after age 71, and it would likely make sense for them to draw some money down sooner than that. They will be paying some level of tax on all of that $ 900,000.
Tom and Mary also have a cottage and a U. S. residence that will likely face meaningful capital gains taxes when they are sold. It is also possible that they may have some U. S. estate taxes to deal with on not only their Phoenix house, but also on the U. S. stocks in their portfolio.
What I find most interesting is that there’s no advanced tax deduction strategy used: Everything Tom and Mary are doing would be pretty plain vanilla planning.
As the saying goes, there really are only two certainties in life: death and taxes. Even if the rich can avoid paying any taxes for a period of time, just as the Mounties always get their man, the Canada Revenue Agency is pretty good at eventually getting their taxes.