Tax Strategies and Deductions for 55+ Canadians- Part 3

March 22, 2011

By Heather Compton and Dennis Blas

Senior Canadian Taxes Welcome back to Part 3 of our tax strategies series. In Part 1 we looked at tax deductions to reduce the income subject to taxation: Part 2 focused on tax credits to reduce the amount of tax paid. In this, our final article in the series we’ll look at tax shelters and income splitting.

Another reminder of the fine print – get qualified advice on your personal tax situation as this is just a general guide. See the Canadian Revenue Agency web site or Tax for some helpful resources.

Tax Shelters

Tax Free Savings Accounts
As of January 2009, the new TFSA was created. They are very valuable for all Canadians to truly shelter investment income from tax; they don’t simply defer the tax. They are also useful for partners to income split as you may “gift” a contribution to your spouse with no income attribution. (Learn more about TFSAs).

As of January 2011 you could have as much as $15,000 plus growth sheltered here ($5000 for each of 2009, 2010 and 2011) – double that if your spouse also has a plan. Some investors got their hands slapped by Canada Revenue Agency last tax year as they were popping funds in and out of these accounts as if they were bank accounts. If you make a withdrawal you must wait until the following year to re-contribute

RRSPs and Spousal Retirement Savings Plans
Provided you have earned income (rental income from investment properties and employment or self-employment counts, but investment earnings from your portfolio does not) you can continue to contribute to registered accounts until you turn 71! It is possible to continue to contribute to a spousal account after you are 71 provided your spouse is under 71. The income earned in this and other tax sheltered accounts is sheltered until we make a withdrawal and is then taxable.

Registered Disability Savings Plans (RDSPs)
This program was announced in March 2007 but the first accounts just came on stream in early 2009. These accounts allow the plan holder to save up to $200,000 in a tax-deferred account on behalf of a disabled beneficiary age 59 or younger who qualifies for the disability tax credit.

Generous government assistance is available via an income-matching grant program and bond incentive programs that are income-tested. This may not benefit you personally but if you have a disabled family member you want to provide for, you simply must look into this program. See more information on RDSPs.

Registered Education Savings Plans (RESPs)
My mother gave a very special gift to her all grandchildren by contributing to their education costs through a family RESP account. I want to do the same for my grandchildren one day but I just need to get some first! An RESP is a tax-sheltered fund to be used for the benefit of the named beneficiary (or beneficiaries) for post-secondary education. You can also name yourself as a beneficiary. Further details on the program can be found on the CRA web site.

Income-Splitting Opportunities With a Spouse or Partner
Sorry singles, no income splitting opportunities exist for you. As couples moving into our later or retirement life phase, two financial issues become quite important. How do we share the income we receive in order to pay the lowest possible tax rates? Plus, how do we assure our continued eligibility for means-tested programs such as Old Age Security or tax credits such as the Age Credit?

For tax years 2007 and forward, the Federal Government allowed couples receiving eligible pension income to split up to 50% of that income when filing their returns. Use form T1032.

Those age 65 or over are eligible to split the following sources of income:

  1. Registered Pension Plan payments (Company Defined Benefit Plans)
  2. RRIF Payments (including LIFs and LRIFs created through Defined Contribution Pensions)
  3. Lifetime annuities purchased from Registered funds (RRSPs)
  4. The interest component only of Prescribed and non-Prescribed annuities

Those under age 65

  1. Registered Pension Plan payments (Defined Benefit Plans)
  2. Funds from 2 to 4 above only if received because of the death of a spouse

So what is ineligible for income splitting? Old Age Security (OAS), Guaranteed Income Supplement (GIS), RRSP withdrawals (I must have a RIF and be 65 and over) and income from Retirement Compensation Agreements (RCAs). Technically, Canada Pension Plan (CPP or QPP) is also ineligible but an opportunity for splitting this income already exists under separate legislation provided we are both over 60 years of age. You cannot split investment income such as dividends, interest income, capital gains or rental income from investment properties if those investments are owned in your name only.

Before you automatically split all eligible pension income 50/50 with your spouse, use tax software or ask your accountant to model possible scenarios. OAS claw-back begins at a base amount of $66,733 (2010). The repayment is 15 cents of OAS for each dollar that your income exceeds the claw-back threshold – it will be fully clawed back at a net income of $108,090 (2010). Age and pension credits are also phased out at higher incomes. We don’t want to transfer so much income that our spouse loses these valuable credits. Regretfully, many of us will not have the too-much-income problem.

Other strategies exist to split income and reduce taxes – contribute to spousal RRSP accounts, “gift” TFSA contributions and share or shift investment income.

Dealing with tax issues needs to be top of mind all year long in order to have the greatest impact. Further information on tax planning and other financial issues is covered in our book – Retirement Rocks!

About the Authors: Heather Compton has presented seminars on financial and retirement lifestyle issues for over 30 years. She retired as Vice President and Senior Investment Advisor with a major financial services company. Heather and husband Dennis Blas co-present retirement seminars for a variety of corporate clients and are the co-authors of Retirement Rocks! Canadian Boomers Invest in Life. You can find their book online or in independent bookstores. See more of their advice at Retirement Rocks.

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