Low-income seniors should be wary of the Guaranteed Income Supplement (GIS) phaseout

Published On February 27, 2013 | By Joseph (Ken) | Retirement

retirementI constantly rant that anyone making less than $40,000 should not be buying RRSP’s but instead investing in the TFSA (Tax Free Savings Account).  

The article Low-income seniors should be wary of the GIS phaseout touches on one of many reasons why – the Guaranteed Income Supplement (GIS).

Now suppose next year you retire and receive Old Age Security and Guaranteed Income Supplement (OAS/GIS). Suppose for some reason you withdraw that $1,000 contribution. That withdrawal will count as income for GIS purposes and it will be subject to the GIS phaseout. Say that phaseout is 50 per cent: In some circumstances it will be higher. Hence you will have 50 per cent left from your $1,030 or $515 plus the $309 from outside or $824. Your rate of return on your $1,000 would be minus16 per cent. Not good.

“There is nothing new here. Richard Shillington described the problem in papers for the C.D. Howe Institute in 1999 and 2003. Unfortunately the common message that RRSP contributions are good is geared for the affluent and not for those with lower incomes. But including the GIS phaseout, low-income seniors in Canada are subject to very high effective tax rates. It is wise to be aware of them.

As per the government (CRA) website the GIS “provides additional money, on top of the Old Age Security pension, to low-income seniors living in Canada.”

The problem with a RRSP is that a withdrawal from your RRSP is considered income (not so with a TFSA).  As the Guaranteed Income Supplement (GIS) is based on how much income you earn, the more RRSP’s you withdraw, the less money you receive from the GIS.

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About The Author

Joseph (Ken)
(Ken) is a Registered Public Accountant with over 25 years of public practice experience in the accounting profession. Ken specializes in accounting information systems, taxation and financial reporting.

One Response to Low-income seniors should be wary of the Guaranteed Income Supplement (GIS) phaseout

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