Many dentists believe they will have no liabilities when they retire. Th ey often forget the largest hidden liability; taxes. Here are two common areas where hidden liabilities could arise.
REGISTERED RETIREMENT SAVINGS PLANS (RRSP)
For dentists who contribute the maximum amount possible, an RRSP worth $1 million is not unusual. This also comes with a tax liability of potentially more than half a million dollars. On top of the taxes, you could also lose tax
benefits such as Old Age Security (OAS). OAS pays you up to $570 per month when you turn 65 and is reduced when your income exceeds $72,809 annually. Avoid this situation by considering the following RRSP withdrawal
Early and Often
If you are under 65 years old and want to receive all OAS payments, consider taking out a significant portion of your RRSPs before you become eligible for any government benefits. This works best if you are an early retiree with little to no income and have a large RRSP. In some cases, you may want to start withdrawing as early as your 50s. This may reduce the overall taxes on your RRSPs and preserve your OAS benefits.
Match your RRSPs with expenses
Expenses tend to fluctuate even during retirement. You may decide to make a big purchase or help your loved ones purchase a home at some point in time during your retirement. Taking out sufficient RRSPs to fund these expenses may be more tax efficient than waiting until you turn 71 and are forced to make withdrawals. You get to use the money when you need it the most, even if it means paying taxes earlier.
Defer until the end
For those dentists who don’t need their RRSP, are still working past 60 and want to avoid taxes for as long as possible, you can defer your RRSP withdrawals until age 71. At this point, your RRSP becomes a Registered Retirement Income Fund (RRIF) and minimum withdrawals must be made. The amount you must withdraw will depend on several factors and could be reduced depending on your spouse’s age. Deferring withdrawals does delay the tax burden initially, but may result in more overall taxes in the long run. Your large RRIF withdrawals combined with Canada Pension Plan, investment income and possibly business or employment income, may also prevent
you from ever receiving OAS benefits.
OTHER RRSP TIPS
Forego or reduce your RRSP contribution
If your RRSPs are already large and you want to receive OAS payments, invest in a tax free savings account (TFSA) or non-registered investment instead of RRSPs. Withdrawals from a TFSA do not affect your eligibility for OAS and while income from non-registered investments could affect your OAS, the principal investment does not affect your OAS.
Contribute to a Spousal RRSP
If your spouse doesn’t have a large RRSP, you can contribute to their RRSPs while claiming a tax deduction for yourself. Two people withdrawing $500,000 each in RRSPs will result in less tax than one person withdrawing $1 million.
Another area where hidden liabilities could arise is due to a poorly drawn up will. Wills form the basis of your estate plan and should be updated to reflect your desires as they change. The first hidden liability is probate fees. These fees amount to approximately 1.5 per cent of the value of your assets and are charged in order to distribute assets from your estate. Here are some ways you can minimize probate fees:
If you have a corporation (PC, HSC/TSC, rental company metc.) consider double wills; one will for the corporation and another will for your personal assets. Probate fees would still apply to your personal assets, but would not apply to your corporation shares. On a practice worth $1 million, this could save you about $15,000 in probate fees.
Select beneficiaries and Successor-holders
Ensure you select beneficiaries for your RRSP/RRIF and life insurance policies as probate fees are avoided if a beneficiary has been assigned. For TFSAs, you can name your spouse as a “successor-holder.” This avoids probate fees and simplifies paper work upon death. If you do not have a spouse or wish for someone else to receive your TFSA, assign a beneficiary.
Distribute the right assets to the right people
Death triggers the sale of all your assets which means a potentially significant tax bill. Certain assets can be transferred to certain people without immediate tax consequences. Distributing the right assets to the right people in your will could mean significantly less taxes and significantly less headaches upon your death. Review the chart below:
Taxable upon death?
|Life insurance proceeds||No||No||No|
|Investments (TFSA, non-registered, public companies)||No||Yes||No|
*Home will not be taxable if it is designated as the principle residence
** Assumes cottage is not designated as the principle residence
Crossing the finish line
After a long career, you don’t want to fall short of the finish line at the very end. Taking the time now to plan will allow you to cross the finish line and achieve your financial goals even if you are not physically present.
This article was prepared by David Chong Yen, CPA, CA, CFP and Louise Wong, CPA, CA, TEP of DCY Professional Corporation Chartered Accountants who are tax specialists and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail firstname.lastname@example.org / email@example.com. Visit our website at www.dcy.ca. This article is intended to present tax saving and planning ideas, and is not intended to replace professional advice.