What is the Credit Card Nerd GIS Maneuver?
The Credit Card Nerd GIS Maneuver or the CGM is a process of reducing your taxable income to get the most of your GIS in the most tax efficient way.
For the CGM to work, you would need to be at least 65, but less than 71 on December 31st. You must also be getting Old Age Security (OAS) and you must apply for the Guaranteed Income Supplement (GIS). Note: The CGM is only effective for singles, divorcees and widows.
The CGM works best for Canadians that have a somewhat small workplace pension, but have yet to apply for CPP. Also Canadians that are working, but earning less than $21,000 and haven't collected CPP and have a workplace pension or significant savings in their RRSPs.
Credit Card Nerd Math
The GIS claw back is borderline cruel to some Canadians, you should use that to your advantage.
Let's start with the Canadian that has a small work place pension, but hasn't started collecting CPP and has been pulling money out of their TFSA.
The GIS maximum benefit is $773.60 per month ($9,283.20 a year), but even a $1,500 monthly pension will have the entire GIS clawed back. Your monthly income would be $570.52 (OAS) + $1,500 Pension = $2,070.52 or $24,846.24 annually. Most websites would tell you not to buy RRSPs if you make $24,846 a year and are on a workplace pension, but the Credit Card Nerd is not like most websites.
Let's run the numbers. The GIS will be completely clawed back when you earn $17,304 not including your OAS benefit. Currently you are earning $18,000 in pension income and would need to reduce your income by $18,000 to have none of the GIS clawed back. We recommend that you transfer $18,000 in RRSPs. Not for the roughly $1,200 to $1,600 in income tax savings of course, but for the $9,282.20 in GIS benefits that you will receive this year.
If you have cash on hand great, if not a RRSP loan would work too as long as you remember to pay off your loan as you get your GIS payments.
Why do you come out ahead. First off you will get the $9,282 in GIS payments plus $1200 in income tax savings, but we will round down the total amount to $10,000 to factor in different tax rates in different provinces and for the loss of non-refundable tax credits, because of the low taxable income for the year.
Of course you will have to pay taxes when you withdraw your savings from your RRSP, but you can do that when you start your first CPP payments. Why does it matter? Because the year you start your CPP, there is no chance that you will have any GIS payments. Your monthly income would be $570.52 (OAS) + $1,500 (Private Pension) + $700 (CPP) = $2,770.52 a month. The GIS cutoff for any benefits is $17,304 and that is any income excluding your OAS. Your CPP and private pension alone will push you over that limit.
At $2,770.52 a month you will get paid $33,246.24 annually. Still a reasonable distance to a high tax bracket. You put in $18,000 and got $10,000 back already. You would need to have a marginal tax rate of 55.5% to pay the same back in taxes. You will more likely be paying around 25.5% on your top marginal tax bracket. Netting you $5,410 in tax savings. The math works like this; $10,000 - ($18,000 x 25.5%) = $5,410. That would be a 30% after tax return on your money. $5,410/$18,000 = 30%
It is also the same if you are currently working and on OAS. It is even somewhat better, because you will have your first $3,500 deducted from your employment income. So someone earning $1,791.67 a month will have the same CGM net benefit as someone with a $1,500 monthly pension or if you were earning $1,500 a month you would only need to transfer $14,500 to a RRSP account to get the same $5,410 net return. That would be a 37.3% after tax return on your money. $5,410/$14,500 = 37.3%
A Wake Up Call
Please contact a financial advisor before attempting the CGM and have them look over your GIS forms as well so that they are done 100% correctly. Not doing it properly will be a very expensive mistake. Also reevaluate the plan each year or just do it on your final eligible year.
Very Important Note: It is very easy to make a mistake. If you do not fully understand or are unsure on how to pull the CGM off, then don't do it or at the very least contact a financial advisor to guide you the entire way. Making a $18,000 RRSP contribution when you make less than $25,000 can back fire easily if not done 100% correct. There is also a decent chance that you may be audited, because this is an unorthodox way to do your taxes to say the least. So it would be best that you fully understand what you have done and how it was done.
$773.60 GIS http://www.esdc.gc.ca/en/cpp/oas/payments/tab1_1.page
$0 GIS http://www.esdc.gc.ca/en/cpp/oas/payments/tab1_43.page#above
Instruction Sheet and Application Form http://www.servicecanada.gc.ca/cgi-bin/search/eforms/index.cgi?app=prfl&frm=isp3025&ln=eng