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Tax Relief for Canadian Seniors
Canada’s New Government recently proposed a Tax Fairness Plan that would deliver over one billion dollars of new tax relief annually for Canadians. The Plan, which increases the Age Credit Amount and allows income splitting for pensioners, builds on the $20 billion of tax reductions provided for individuals in Budget 2006 and will significantly enhance the incentives to save and invest for family retirement security.

Age credit enhancement
The age credit is a special federal income tax credit for Canadians 65 years of age and older. The amount eligible for the age credit will be increased by $1,000 to $5,066. Importantly, the increase will be effective January 1, 2006. As a result, for this and subsequent taxation years:

Lower and middle income seniors will receive up to about $150 of additional income tax relief for 2006; and,
Lower and middle-income senior couples will receive up to about $300 for 2006 in additional tax relief.
For 2006, the age credit begins to be phased out when net income reaches $30,270. The phase-out rate is 15%, which means that the credit, which was fully phased-out at $57,377, will now be fully phased-out only when net income reaches $64,043.

Pension income splitting.
Many Canadians face challenges in planning and managing their retirement income. Coupled with the desire to provide targeted assistance to pensioners, beginning for the 2007 taxation year, Canadian residents who receive income that qualifies for the existing pension income tax credit will be permitted to allocate to their resident spouse (or common-law partner) up to one-half of that income.

How it will work
For income tax purposes, the amount allocated will be deducted in determining the income of the person who actually received the pension income and included in computing the income of the person to whom some or all of the pension income is allocated. Since it will in many cases increase the transferee’s tax payable, both persons must agree to the allocation in their tax returns for the year in question.

The pension income that is allocated will retain its character and be treated as income of the lower-income spouse for all purposes under federal income tax rules. This means that some couples may now receive a second pension income tax credit where previously only one was available. In addition, splitting pension income could mean higher Old Age Security entitlements for some couples.

Eligible pension income

For individuals aged 65 years and over, the major types of qualifying income that can be allocated to a spouse or common law partner are:

a pension from a registered pension plan (RPP) ;
income from a registered retirement savings plan (RRSP) annuity; and
payments out of or under a registered retirement income fund.
For individuals under 65 years of age, the major type of qualifying income that can be allocated to a spouse or common law partner is income from a pension from a registered pension plan.

Some types of income that could be considered pension income do not qualify for the pension income credit. For example, Old Age Security payments, Canada or Québec Pension Plan payments and payments from certain supplemental retirement compensations arrangements (RCAs) do not qualify. For further information on income that qualifies for the pension income credit, contact CRA at www.cra.gc.ca or 1-800-959-8281.

There is no age restriction for the spouse or common law partner who receives the income allocation.



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Last Updated: 2007-01-11

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Qs and As on The Tax Fairness Plan
General Questions
Q: How will seniors and pensioners benefit under the Tax Fairness Plan?

A: The Tax Fairness Plan proposes to deliver more than $1 Billion in tax reductions annually for Canadians by significantly increasing the Age Credit – retroactive to January 1, 2006 and permitting couples with eligible pension income to reduce their combined taxes by transferring income to the lower-earning spouse.

Q: What levels of tax reductions can individuals expect under the plan?

A: The level of reductions under the Plan’s proposed measures will vary based on the particular circumstances of individuals and couples.

For example, the increase in the age credit amount would raise the maximum tax relief available under the credit to almost $800 per individual and more than $400 million in total for 2006. However, to target relief to low- and middle-income seniors, the maximum amount is available only to those seniors with net incomes below $30,270 and the credit is fully phased out when net income reaches $64,043.

With regard to pension splitting, the amount by which a couple’s total income taxes would be reduced depends on things such as how much pension income a couple earns, whether both partners earn pension income and in what province they reside. In total, $675 million of tax relief is anticipated under the pension splitting measure for the 2007 taxation year.

Pension Income Splitting/Age Credit Increase
Q; How will pension income splitting work?

A; Both the individual receiving the eligible pension income and his or her spouse or common-law partner must agree to the allocation in their tax returns for the year in question.

The pension income splitting allocation will be available for the 2007 and subsequent tax years and must be made one year at a time.

How much pension income can an individual split?
An individual in receipt of eligible pension income will be permitted to allocate up to one-half of this pension income to their spouse or common-law partner.

What income is eligible to be split?

Income eligible for the pension income credit may be split. Generally, this is:
Income in the form of a pension from a registered pension plan (RPP), regardless of the recipient’s age (i.e., a pension from an employer-sponsored defined benefit plan or defined contribution plan).
Income from a registered retirement savings plan (RRSP) annuity, a registered retirement income fund (RRIF), a LIF (a locked-in RRIF), or a deferred profit sharing plan (DPSP) annuity, if the recipient is 65 years of age or older.
Income that is ineligible includes:
Old Age Security (OAS)
Guaranteed Income Supplement (GIS)
Canada Pension Plan / Quebec Pension Plan
RRSP annuities, RRIFs, and DPSP annuities (if recipient is under age 65)
RRSP withdrawals
Income from retirement compensation arrangements (RCAs)
While CPP income does not qualify as eligible pension income for the pension income credit, existing rules permit CPP pensioners to split their CPP retirement benefit.

Spouses and common-law partners, who are both at least 60 years of age, can share up to 50 per cent of their CPP retirement benefit, with the split between the partners determined by the number of years they lived together during the period they were required to contribute to the Plan.
Q. Why is there an age 65 requirement for RRSP annuity, RRIF and LIF income?

A. The purpose of the age 65 requirement in respect of RRSP annuity, RRIF and LIF income is to target the pension income credit to retired individuals.

Individuals have much greater personal control over the timing of withdrawals under RRSPs, RRIFs and LIFs compared to RPPs.
Without the age 65 eligibility rule, many individuals who are not retired could gain significant tax advantages well before they attain age 65 by arranging to withdraw money each year as RRSP annuity or RRIF income while still saving for retirement.
Individuals in receipt of RPP income, on the other hand, generally have little control over the timing of their pension payments -- they usually only receive such payments when they are retired.
Q. Why won’t higher-income single pensioners benefit from the Tax Fairness Plan?
A. The Tax Fairness Plan is designed to help the most vulnerable seniors. The increase in the age credit would provide more than $400 million of tax relief to low- and middle-income seniors with the maximum tax relief available to individuals under the credit increasing to about $800. Allowing pension income splitting is a major positive change in tax policy for pensioners that provides $675 million of tax relief for the 2007 taxation year

Q. Why does a $1,000 increase in the age credit amount only save me about $150?

A. The age credit is a non-refundable tax credit. Under the Tax Fairness Plan proposal, the amount of income eligible for the age credit will increase to $5,066.. Credits are calculated in reference to the lowest personal income tax rate (15.25 per cent in 2006). Therefore, a $1,000 increase in the age credit amount proposed in the tax fairness plan will save eligible taxpayers up to $152.50. In total, the age credit amount can reduce federal taxes payable by up to $773 (15.25 per cent of $5066).

Q. Will all seniors benefit from an increase in the age credit amount?

A. The increase in the age credit amount would provide tax relief to about 2.1 million seniors.

The age credit is targeted to low- and middle- income Canadians age 65 or over. In this regard, the age credit amount is reduced by 15 percent of net income in excess of $30,270. The increase in the credit amount means the point at which the age credit is fully phased out increases by more than $6,600, to $64,013, meaning even more seniors will benefit from the age credit.

The age credit can reduce taxes to zero, but will not be refunded. However, unused portions of the age credit amount can be transferred to a spouse to reduce their taxes owing.



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Last Updated: 2007-01-11