No easy answer on best time to take pensions
To defer or not to defer (government pensions), and taxation of an eBay spinoff, were the among the topics addressed in this week’s reader questions. Here’s what they wanted to know.
Q: “I’m considering delaying the start of my Quebec Pension Plan (QPP) and Old Age Security (OAS) cheques beyond age 65. A colleague suggested strongly that’s the wrong way to go, that it’s better to get it sooner than later (or not at all). What do you think?”
A: This has become an interesting financial-planning puzzle since governments added enhancements for delaying and upped the penalty for taking QPP early. Not many people choose to wait until after 65 to get their cheques, despite the fact they’re entitled to a significant bonus (0.7 per cent for QPP, 0.6 per cent for OAS), for every month they wait between ages 65 and 70. The general feeling seems to be that it’s better to get and spend the money while you’re younger, and more active, whether or not you need it. And yet, it can make good sense to hold off, especially if you’re still earning employment income and in good health. Retirees who are single and have large RRSPs also may find it advantageous from a tax and risk standpoint to pull more out of the RRSP in their 60s and use the guaranteed government pensions to supplement RRIF withdrawals in their 70s. The math is roughly this: if you start your QPP at age 60, absorbing a significant penalty (36 per cent in 2016) for doing so, it’ll take about 11 years for the person who starts at 65 to overtake you in total money received. If you wait until 70 for QPP, you’ll overtake the person who took it at 65 around age 82.
Q: “I purchased shares of eBay in 2014. It spun off (online payments system) PayPal in 2015 and I got an equal number of PayPal shares. I then sold my eBay shares. How is this going to be treated for tax purposes and what is the cost of my PayPal shares?”
A: Jamie Golombek, managing director of tax and estate planning for CIBC Wealth Advisory Services, said that for Canadian investors, the eBay tax picture is still unclear. “As of now, for Canadian tax purposes, the spinoff of the PayPal shares is considered to be a foreign dividend ‘in kind’, and the fair market value of the PayPal shares received is taxable and would be reported to you on a T5 slip from your financial institution or broker.” But eBay told him it has applied to the Canada Revenue Agency to have the PayPal dividend qualify under a tax provision that allows distributions from foreign spinoffs to be exempted as foreign income and instead allocated to the tax cost of both companies’ shares, pro rata to their relative fair market value. They would trigger a capital gain (or loss) only when sold, potentially benefiting from the advantageous tax treatment of capital gains. EBay said an answer from CRA is expected in about six months — around the time 2015 tax returns are due.