Less Taxes….More Retirement Income

The following article was contributed by Ottawa-based financial planner Rick Sutherland, CLU, CFP, FDS, R.F.P.

Further to our story on the tax changes proposed in the 2007 federal budget, we bring more detailed news on the opportunity for those who are retired. These changes specifically refer to the opportunity for couples to take advantage of income splitting.

Why should we be concerned about Income Splitting? In Canada we have a progressive income tax system. The more income you make, the higher your tax burden. Retired couples can now use the new income splitting rules to help reduce the ever-increasing progressive tax rates. This is achieved by transferring income from a higher income-earning spouse to a lower income-earning spouse. It has proven to be a significant tax reducer as a couple receiving two smaller incomes at retirement is taxed at a lower rate than one person receiving a large portion or all of the household income.

The new rules apply only to income that’s eligible for the pension tax credit. Therefore, if you are 65 years or older, you can split up to 50% of the following incomes: Registered Retirement Income Funds (RRIF), Life Income Funds (LIF), Locked-in Retirement Income Funds (LRIF) and Annuities purchased from Registered Retirement Saving Plans (RRSP) or Deferred Profit Sharing Plan (DPSP) assets. There is no age restriction on company Registered Pension Plan (RPP) benefits. You can also split Canada Pension Plan (CPP) benefits starting at age 60 but only for the benefits accumulated while you were a couple.

By way of an example, we can look at the tax saving where there is one spouse earning a pension plan benefit of $100,000 and neither spouse earns any other income. She decides to split income to the maximum amount of $50,000. The tax savings is greater than $5,000. And did we mention that both spouses are now eligible for the pension credit, which has doubled to $2,000? This extra income will be a welcome addition to all retirees who take advantage of the new rules.

Furthermore, if you are 65 or older you are eligible for the age tax credit and Old Age Security (OAS) benefits. This age credit is potentially worth another $5,066 in tax credits. Depending on your income there is a reduction for those earning more than $30,936. Any unused portion of the credit can be transferred to your spouse. OAS does have a claw-back feature that begins at income of $63,511.
You can see there may be thousands of tax dollars to be saved by implementing these income-splitting strategies starting in 2007. As always there are rules that must be followed and you should seek the advice of your trusted financial advisor to assist you with making these decisions. The sooner you start planning, the faster you can begin planning how to spend this newfound money.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of FundEX Investments Inc. with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.

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