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.

Everyday Tax Saving Strategies

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

Everyday Tax Saving Strategies

In Canada we supplement our four seasons of weather with additional seasons to represent major money and tax saving events. We have just passed the “RRSP Season.” It’s the time of year when people who want to save a few dollars on their income taxes will stock a few dollars away in an approved Registered Retirement Savings Plan. We have now entered the “Tax Season.” This is the time of year when everyone has to reconcile his or her income and expenses with the federal government.

It’s too late to make tax-planning decisions that will have much of an impact on your 2006 tax return. Other than RRSP contributions, the time to do that was before December 31. You can however, begin making plans that will have an impact on the taxes you pay in 2007 and beyond.

Decisions to place money into a Registered Retirement Savings Plan, RRSP, will reduce your taxable income and possibly result in a tax refund or reduce the amount of tax owing. The RRSP has added benefits of tax deferral and tax sheltered growth. You can defer this income to a later date, possibly to a time when you are earning much less income and realize a huge tax saving. During the period of deferral your investment grows tax free or sheltered. The name of the RRSP game is immediate tax reduction, tax deferral and tax sheltered growth.

Another tax planning strategy is income splitting. This involves decisions that will shift income from a high-income person to a low-income person. Spousal RRSPs have been the obvious planning opportunity to shift retirement income to a lower income spouse or partner. The federal government announced last fall that pensioners, starting in 2007, could split up to 50% of pension income with their spouse. Due to age restrictions the viability of a spousal RRSP still warrants a close look.

Opening up “in-trust” accounts for minor children could have the effect of shifting income into the hands of your child. Capital gains are taxed in the hands of the child rather than the parent. Watch out though, as dividend and interest income will still be taxed in the hands of the parent.

Plan your retirement income carefully. It may be to your advantage to convert your RRSP into a Registered Retirement Income Fund, RRIF, early. The concept is to reduce the RRIF capital and therefore lower the mandatory RRIF payment in later years. This strategy could be helpful to preserve your ability to receive the Old Age Security benefit without the claw back. The current claw back begins at income levels above $63,511.

Tax planning strategies should not be seasonal but should be considered very carefully throughout the year. Speak to your financial planner to learn more about these and other tax planning strategies.

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. Website: http://www.invested-interest.ca/