A woman I am helping by the name of Linda Chamberlain will be turning 65 in July 2014. I am helping her fill out her Old Age Security (OAS), Canada Pension Plan (CPP) and Guaranteed Income Supplement (GIS) applications. She has given me permission to talk about her situation.
Her income will go from about $700 a month from the Ontario Disability Support Program (ODSP) to about $1,400 a month from OAS, GIS and a little known program called the Guaranteed Annual Income System for the Aged (GAINS-A). That’s the good news.
Linda is eligible for $100 a month in CPP Retirement benefits but we did not apply for her CPP. Many community members have asked why we refrained from applying. My answer is that her CPP would be clawed back on a dollar for dollar basis and no one forces anyone to apply for CPP. She can wait until she is 70 if she wants.
Not many people realize that seniors with extremely low income have their CPP benefits clawed back at 100% if their CPP is less than $168 a month. The table that reveals this policy can be found on an obscure website provided by the Ontario Ministry of Finance. The table shows that the GAINS-A clawback is 50 cents on the dollar. It also shows that the GIS clawback is 50 cents on the dollar.
Fifty plus fifty equals one hundred. If Linda applies for CPP, her net income will go up by exactly zero – so there is no reason to apply. However, if Linda waits until she is 70, her CPP entitlement would go up by 42% because you get more if you wait to apply. Sadly, unless Linda works, she will still lose every cent of her CPP to clawbacks because her entitlement at age 70 of $142 a month would still not reach the $168 threshold where the 100% clawback changes to 50 cents.
But this is a wakeup call to very low income seniors and their advisors who routinely apply for CPP at 65. Persons with CPP entitlements equal to the $168 threshold (for a single person) would be much better off to wait until they turn 70 because their CPP entitlement would rise to $239 a month and the extra $71 would be clawed back at 50% instead of 100%.
You might say: “All that for an extra $35.50 a month when you turn 70?” My answer is that $35.50 for the rest of your life is a whole lot better that zero extra for the rest of your life.
This got me thinking of what would happen to Linda if she did go back into the paid workforce on turning 65. I often see elderly looking women working in fast food places especially when I travel outside of Toronto. Are they as badly off as Linda with her 100% clawback on income?
It turns out that they are not quite as badly off as Linda but their effective rate of taxation on earnings above $3,500 a year is still the highest of anyone working in Canada. And it just grows as they work more hours and start to get near full time work. Now who knew that?
A woman I know – let’s call her Doris – works at a fast food chain. She gets 32 hours a week at minimum wage. After 12weeks of work – around the second week of March– Doris has grossed $3,500.
At this income threshold, two things happen. The first is that Doris starts to pay into CPP at a rate of 4.95%. This new policy started on January 1, 2012. Before that, seniors taking on part time work after retirement did not have to pay into CPP. (Doris did not know that she could elect to stop paying into CPP by filling out a form: See: http://www.cra-arc.gc.ca/E/pbg/tf/cpt30/cpt30-13e.pdf)
The second is that her GIS starts to be clawed back at 50 cents on the dollar. The government of Canada website on this matter shows that the government has a sense of humour with the following headline:
“Government of Canada helping low-income seniors”
We are now at an effective tax rate of 54.95%. Now let’s add in Employment Insurance premiums for a type of insurance that she will likely never qualify. This amount is 1.88% and when added to 54.95%, the new effective tax rate is 56.83%. But Doris gets to deduct her CPP contribution of $671. and her EI contribution of $321. This brings her marginal effective tax rate down to 53.42%.
Doris also gets the Working Income Tax Benefit (WITB) but the amount she receives is just $115.25 for the whole year and Doris is in the phase out zone of the WITB which is 15%. This brings her marginal effective tax rate to 68.42%
But we are not done yet. Doris lives in rent geared to income housing. When her income goes up, her rent goes up. Although her rent goes up by 30 cents on each dollar earned, her clawbacks are such that the net effect is a 15% hike bringing Doris’s effective tax rate to 83.42%. Doris takes home 16 cents on the dollar on her income after about $13,000. After transit and other work expenses, Doris has a real net take home pay of about $4,500 a year (her first $3,500 + $1,000 or so after work expenses).
And let’s remember that the highest marginal effective tax rate for the well to do and millionaires in Canada is 46%. I wonder if they understand that when they order their coffee from Doris that her effective tax rate is over 37 percentage points higher than theirs.
The two people that work beside Doris in the fast food outlet with her same hours of work have an effective tax rate of 27% because at 32 hours a week at minimum wage, they pay income tax. Doris does not -but her clawbacks come from other places.
So there you have the answer to a question many Canadians ask:
‘Mirror mirror on the wall: who is the highest taxed of all?
Bet you didn’t know it was our poorest seniors.
js/January 21, 2014 – revised January 25, 2014 and February 2 and 4, 2014