Tax Fairness Plan:  Information for Seniors

Qs and As on The Tax Fairness Plan

General Questions

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.

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

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.

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.

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.

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).

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.