Tax changes that are good for you
Almost every year, the federal government announces tax changes that can have a major impact on Canadians. Sometimes, important adjustments can be overlooked because the public paid too much attention to specific changes like in October 2006 when proposed changes allowing the taxation to Income Trusts were introduced.
During that same October, consumers did not seem to notice other government announced tax changes that will also have significant and – best of all - beneficial impacts to many retired Canadians.
Increased Age Credit
The federal government introduced a $1,000 increase to the maximum amount of the age credit to $5,066, effective January 1, 2006. The age credit is a non-refundable tax credit available to Canadians 65 years of age and older.
For 2007, the age credit is $5,177. If your net income is under $30,936 you may be eligible for the full amount of the credit. However, if your net income is over $30,936, the age credit is reduced by 15 per cent for every dollar of net income over this amount. The age credit will only be fully phased out at a net income of $65,450.
Pension Income-Splitting
Canada’s income tax system generally requires each individual taxpayer to report and pay tax on all of the income they earn. Since individual tax rates rise as taxable income passes from one tax bracket to another, a spouse in a higher tax bracket will usually pay more tax on their income than their spouse who is in a lower tax bracket.
As of 2007, those individuals who receive income that qualifies for the existing federal pension income tax credit are able to allocate up to one-half of that income to a spouse or common-law partner living in Canada. For those individuals aged 65 years and over, eligible pension income includes:
- lifetime annuity payments under a registered pension plan (RPP) or a foreign pension plan;
- lifetime annuity payments under a registered retirement savings plan (RRSP) or a deferred profit-sharing plan (DPSP);
- payments out of or under a registered retirement income fund (RRIF), a life income fund (LIF), a locked-in retirement income fund (LRIF) and a prescribed retirement income fund (PRIF); and
- the “interest” component of the payments under an annuity contract purchased with non-registered funds.
Periodic payments from a RPP also qualify for the pension income splitting even if the recipient is less than age 65.
Other important details with respect to pension income splitting are as follows:
- The pension income credit may be available for both spouses. (The federal credit is calculated on the first $2,000 of eligible pension income received.)
- Pension income-splitting could mean higher Old Age Security (OAS) benefits for some couples. A recipient of OAS whose net income exceeds a “threshold” amount ($ 63,511 in 2007) is subject to a clawback of the benefits. If a portion of the person’s pension income is allocated to a spouse, the allocated amount will be deducted from the pension recipient’s net income. As this deduction would lower the recipient’s adjusted net income, the result could be that less income would be subject to the OAS clawback.
Wait, there’s more…
In the federal Economic Statement of October 30, 2007, , the Minister of Finance proposed the following:
- The basic personal exemption (i.e. the amount that individuals can earn without paying federal tax ) will be increased from $8,929 to $9,600 effective for the 2007 and 2008 taxation years. The amount will be increased to $10,100 for 2009.
- The lowest personal income tax rate will be reduced from 15.5% to 15.0% effective January 1, 2007.
- The Goods and Services Tax (GST) will be reduced from 6% to 5% effective January 1, 2008.
These proposed tax changes have not yet been introduced by the federal government. Investors Group will continue to monitor the situation as it develops. Speak to an Investors Group Consultant for more information on tax changes that may be good for you.
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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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