In the battle being waged between the RRSP and TFSA, many commentators have opined that it really comes down to what your tax rates are today versus what you think they might be when you access your registered funds.
Not statutory tax rates, but rather marginal effective tax rates (METRs), which take into account not only the graduated tax brackets but also include the potential impact of the loss of various government benefits.
In particular, much of the focus among those in the upper-middle income brackets centres on the potential "clawback" of Old Age Security (OAS) benefits. The OAS program consists primarily of a basic OAS pension as well as the Guaranteed Income Supplement (GIS) for the lowest-income Canadians.
Pensioners with net income over certain thresholds must repay part or all of their GIS/OAS. For 2011, GIS is clawed back with income above $6,300 (for a single person) while the OAS range begins around $68,000.
This issue particularly irked B.C. resident George Gaisford, who took the Minister of Human Resources and Skills Development, whose department administers the OAS program, to the Federal Court of Appeal in late January contesting the clawback of his GIS benefits.
Mr. Gaisford, who was appealing an earlier decision of the Tax Court of Canada, claims that his 2007 income for the purposes of determining his benefits should not include amounts received in that year from his RRIF nor should it include the grossed-up amount of dividends received. (Canadian eligible dividends from a public company are subject to an initial gross-up, such that 145% of the dividends Mr. Gaisford received in 2007 were subject to tax, which was then reduced by the dividend tax credit.)
Mr. Gaisford argued that compulsory RRIF withdrawals and the gross-up of dividend revenues should not be treated as income under the OAS Act.
Not surprisingly, the three-judge Federal Court of Appeal panel disagreed, citing section 2 of the OAS Act which defines income as "the person's income for the year, computed in accordance with the Income Tax Act."
The Court acknowledged that Mr. Gaisford was essentially arguing for a policy change to the existing OAS scheme, which he perceives as "unfairly penalizing low income elderly pensioners who have contributed to RRSPs ... however, the courts are not the appropriate forum for (these) issues."
TFSAs 1, RRSPs 0.