Tax Fairness Plan:  Information for Seniors

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.

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