Sunday, April 19th13.9°C
David Allard

Living with Plan B

“It does not do to leave a live dragon out of your calculations, if you live near him.”
J.R.R. Tolkien, The Hobbit

Human beings are optimists by nature. Whether we are talking about our ability to drive, the state of our physical health or our outlook for the future, our default is generally to the positive. In part, that is why we have risen to the top of the food chain - at the same time it can leave us vulnerable and exposed when things don’t go our way. It’s why it’s so important to consider alternative outcomes when planning for retirement.

Too often we build our plans based on best case scenarios: how long will it take us to get to work in rush hour; how much will it cost to build our dream house; how long will we be healthy and active as we age? For some people the answers to those questions are often: looks like we’re going to be late, we’re over budget by how much, and what do you mean I need to replace the other hip now?

Contingency plans are the key to a successful retirement. With a well thought out retirement plan we should consider the potential for things to shift, and map out the steps to take if they don’t. For most of us, those back-up plans tend to be financial in nature but the broader emotional and personal impact need to be considered as well.

Ward and June worked hard to raise a family and build a successful business. They saved and parlayed those funds into an early retirement. For twenty years now they’ve made an annual pilgrimage South to enjoy the sunshine, the golf, and the friends who mean so much to them. In fact many of the friends they spend time with down there are friendships that began long before they retired and a few even date back to when their children were in school together. Three years ago, Ward had a series of health emergencies down South. He had to spend several weeks in a US hospital eventually being medevaced to a hospital in Canada, where he had to convalesce for six long months at home.

As Ward’s health returned, and a winter at home passed, he and June began to make plans to head South for the winter. The first roadblock was the cost of health insurance. With a pre-existing medical condition, costs skyrocketed and even finding a company that was willing to underwrite a policy was difficult. Ultimately restrictions within the policy required them to leave the US, return to Canada and then fly back to the US in order to have coverage for the length of time they wanted. To add to this, the fall in oil prices saw the US dollar appreciate substantially against the Canadian dollar making everything 20-25% more expensive than the last time they had been down.

These were the financial considerations, but there were also personal concerns that couldn’t be quantified. The possibility of another winter in Canada would mean being apart from the people and friendships that have become such an important part of their lives. The depth and colour that these connections brought to their life would be hard to replace; yes they had family at home, but the kids were busy with their own lives and those of their children. 

Fortunately, the story has a happy ending; Ward’s health continued to improve and as a result of careful planning in earlier years, they were in a position to weather the financial difficulties. They went South and enjoyed the heat of an Arizona winter. 

This isn’t the case for all people though; often these kind of curves can be devastating to retirement plans. Aging parents with dementia or major health problems, boomerang kids going through job lay-offs or marital issues can all put a strain on the best laid plans. The unexpected could mean holding off on downsizing the family home—with the empty nest full again. Scarce resources which were earmarked for retirement may suddenly be needed to cover unexpected healthcare costs or “getting-back-on-the-feet” expenses. That isn’t to say that we shouldn’t be willing or happy to help family in need; it just means that we always need to consider the other side of things and have a Plan B in place- especially in retirement.


Do I have to file tax return?

Personal Tax Return Filings

Many people assume that they don’t have to file a personal tax return because they don’t have a balance owing. This isn’t the best rule of thumb to follow. Filing is mandatory in the following situations:

  1. There are self-employment earnings that were subject to contributions for the Canada Pension Plan(CPP) or Employment Insurance Premiums (EI);
  2. Capital property was sold in the year;
  3. Spouses elect to split pension income; or
  4. CRA sends you a request to file a return.


Sometimes filing a tax return is technically not required, particularly when there is no income to report. However, there are situations when it makes sense to file a return regardless of having no income such as claiming:

  • A refund of tax withheld at source;
  • Tax credits such as GST/HST; and
  • Tax benefits and supplements such as: Canada Child Tax Benefit (CCTB); working income supplement, etc.


Filing a tax return is essential to receive benefits such as Guaranteed Income Supplements. It is also the easiest way to establish your contribution room for a Tax-Free Savings Account (TFSA).

Students are also able to carry forward or transfer unused tuition, education, or textbook amounts. Reporting earned income also creates RRSP contribution room.

In addition, when applying for a loan or mortgage, the bank may request a copy of a Notice of Assessment for income verification purposes.


Commonly Overlooked Tax Breaks

Some people pay more tax than needed simply because they tend to overlook some of the savings available to them. Common omissions are as follows:

1.  Capital Losses

Losses from buying or selling shares in an unregistered account can be carried back to offset capital gains realized in any of the three preceding years or carried forward indefinitely.

2.  Pension Income Splitting

Individuals who are 65 years of age or older can allocate up to 50% of eligible pension income to a spouse. This can result in significant savings when one spouse is in a lower tax bracket than the other.

Retiring with purpose

Our lives are always guided by purpose. We may not think we have a grand design working in them, but the fact is, we are always moving with intent. Whether it’s to have more money so we worry less or do more, or we stay active to prolong our health or improve our looks, there is always a reason behind our actions.

An infant’s sole purpose appears to be to touch, to stretch and to experience this new world they’ve been delivered into. Watch a baby repeat a movement with their arm over and over. At first they look like random movements, but over days and weeks the movements slowly gain precision, they are building muscle memory. Their goal is mobility; one step at a time.

A teenager’s purpose is often to blend in and not be the center of attention. They go to great lengths to look and act like everyone else. If you have kids and have watched them get ready to go out you’ll know what I mean. There are also the few who strive to be different or stand out from the crowd; even that is driven by, the need to find the place they fit amongst their peers.

Young adults seem to have many cross purposes: education, relationships, employment, careers, money, parenthood and experiences. The drivers for most of those actions is the need for independence - from their families, their peer groups, their past or the limitations society sets upon them for their youth.

In retirement though, people often see their lives as being without a clear purpose. They often feel they’ve achieved their goals (or missed them), done what they could or just run out of time. Now they spend the rest of their lives in a holding pattern. Watching as the rest of the world drives by, leaving them slowly behind.

I’m arguing that people’s lives never stop having purpose. What happens is they may lose sight of where they are going or they are doing and drift. Purpose is what keeps us alive and relevant. It’s what gets us out of bed in the morning and why we feel energized each day. As humans, it’s integral to our survival at any age. It’s an essential part of our DNA. Making it through to the next day isn’t reason enough; waking up on the right side of the ground isn’t a purpose, its capitulation. It’s a form of blindness.

For most people, purpose is reflected in the things they do every day, their interests, their habits and their passions. We are what we do, whether we’re seven or seventy five. It’s not about saving the world, it’s about doing the things that matter the most, not to the rest of the world, but to you.

What matters? Do you write, paint, work with wood, play bridge, be a grandparent, hang out with your children, run marathons, garden, crochet, read, travel, be a friend, volunteer, work part time, mentor, work full-time? Do what is important to you, do as much as you are capable of and most importantly, do it as if the next third of your life is just as important as the last two thirds were, because it is.


CRA Notice of Assessment

Many Canadians rush to file their taxes on time each year and don’t think about it until the next year. One of the most overlooked notices received from the CRA annually is the annual Notice of Assessment. This notice is very important as it summarizes some of the important information from your previous tax filing.


Notices of Assessment

Your Notice of Assessment is divided into three parts:

  1. The Explanation of Changes and Other important information;
  2. Your RRSP Deduction Limit Statement; and
  3. The Summary.

One should always compare the tax calculation and carried forward balances on the Notice of Assessment against the tax return that was filed and the supporting documents. It is important to ensure that all of the numbers, particularly the carried forward amounts, have been picked up properly. Don’t assume that this will be the case; it is best to confirm.


Explanation of Changes and Other Important Information

In addition to providing a brief explanation of any changes that were made to the return during the assessing process this section contains a lot of valuable information about potential planning opportunities.


Losses Being Carried Forward

Where the taxpayer has reported net capital and/or non-capital losses on their tax return, the Notice of Assessment will provide a running total of any unused losses. Unused net capital losses can be carried back three years or forward indefinitely, but can only be used to offset capital gains. Unused non-capital losses can be applied to reduce all sources of income and can be carried back three years or forward up to 20 years. Unused limited partnership losses are also tracked.

Planning Opportunity – Check to see if it would be beneficial to carry back unused capital losses for up to three years to reclaim the tax that was paid on net capital gains in those years. Also, consider realizing capital gains in the current year to absorb whatever is left.


Deferred Security Option Benefits

The balance of deferred security option benefits are tracked on the Notice of Assessment. This income can be deferred until the year that the securities are sold; the taxpayer dies; or becomes a non-resident.

Planning Opportunity – Consider starting to realize some, or all, of the deferred income in years where earning levels are lower. Remember, for public company shares where the value has dropped and they are now worth less than the tax owing on the declared benefit, taxpayers can file a special election for tax relief if the shares were disposed of before 2015.


Repayment of Old Age Security Benefits

Taxpayers who are 65 years or older will receive a notice of the status of their Old Age Security payments for the coming year and whether some or all of them will be subject to repayment, or “clawback.”

Planning Opportunity – The 2014 Net Income threshold for “clawback” is $71,592. To maximize Old Age Security Benefits consider the impact of triggering controllable income amounts like realized capital gains or a spousal pension income -splitting election to avoid triggering the “clawback”.


Elected Split-Pension Income

The Notice of Assessment will confirm the taxpayer’s election to split pension income with their spouse.

Planning Opportunity – The joint election to split spousal pension income is a great income splitting opportunity and care should be taken to maximize the benefit from this election each year.


Tax Free Savings Accounts

The Notice of Assessment will provide a reminder about the taxpayer’s ability to contribute to a Tax Free Savings Account.

Planning Opportunity – A Tax Free Savings Account provides taxpayers who are 18 years and older with the ability to earn tax free investment income throughout their lifetime. The contribution limit for 2015 is $5,500.


Quarterly Income Tax Instalments

Where a taxpayer may have to pay quarterly income tax instalments, this will be noted on the Notice of Assessment.

Planning Opportunity – A taxpayer should take care to ensure that they are paying the appropriate amount of quarterly income tax instalments. A general best practice is to pay the amounts that are suggested on the Instalment Reminder forms that are mailed to taxpayers in late February and August each year. Failure to pay the appropriate amount of quarterly income tax instalments could result in non-deductible instalment interest charges.


Refund Interest

CRA will pay compound daily interest on a tax refund and this will be noted on the Notice of Assessment. This interest is taxable income and must be included on the tax return for the year that it was received. Interest charged on an unpaid, or underpaid balance of tax owing is not deductible.


Your RRSP Deduction Limit Statement

This section shows the calculation of the taxpayer’s RRSP deduction limit for the current taxation year and any unused RRSP contributions.

Planning Opportunity – It’s never too early to make your RRSP contribution for the year. The sooner the contribution is made the sooner it starts to earn tax-deferred income. Every taxpayer is allowed to make an over-contribution of up to $2,000 to their RRSP. However, it is important to keep an eye on the amount of unused contributions. If this amount exceeds $2,000 and is greater than the RRSP deduction limit for the year, the taxpayer may be subject to a tax of 1% of the over-contribution for each month that there is an over-contribution. This tax can add up very quickly.

Read more Navigating Retirement articles


About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

After two decades in the financial services industry, Jeff's experience as an advisor and branch manager define his approach to providing customized financial planning, estate planning, and managed income solutions. Key to this approach is a thorough understanding of the unique challenges and goals that exist in every client's life. He is a partner in Navigation Wealth Management.

Jeff holds the Certified Financial Planning and Chartered Investment Manager designations. He lives in Kelowna with his wife Tanya, and their two (almost adult) enterprising children.


You can contact Jeff by email at [email protected]


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet presents its columns "as is" and does not warrant the contents.

These articles are for information purposes only. It is recommended that individuals consult with a financial advisor before acting on any information contained in this article. The opinions stated are not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF.

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