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Retirement Planning Highlights for 2007
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The federal government's Tax Fairness Plan of October 31, 2006 and Budget of March 19, 2007 proposed several measures that will affect retirement planning in Canada. These measures are as follows:
Enhanced Age Credit
The age credit is a federal income tax credit that is available to Canadians 65 years of age and older. The age credit is calculated by multiplying the lowest federal personal income tax rate by an 'age amount' that is indexed to inflation. The age credit is a non-refundable tax credit, but the unused portion of the credit may be transferred to a spouse or common-law partner. The age credit is subject to an income test that targets assistance to seniors who need it most. For 2007, the age credit is $5,177, up from $5,066 in 2006, and begins to get phase out when income levels reach $30,936.
Pension Splitting
The Tax Fairness Plan includes a new mechanism for pension income splitting. The measure allows any Canadian resident who receives income that qualifies for the existing pension income tax credit to allocate up to 50% of that income to their resident spouse (or common-law partner).
Pension income that is eligible for sharing is any income that is eligible for the pension income tax credit. A taxpayer can claim a federal tax credit of 15.5 % on up to $2,000 of eligible pension income.
The type of pension income that is eligible for the pension tax credit and thus for pension sharing under the new proposals, depends on the recipient's age, with more options available after the recipient reaches 65 years of age.
Recipients at least 65 years old
- Payments from a RRIF, LIF or LRIF
- Term or life annuity payments from a registered pension plan
- Term or life annuity payments from an RRSP or DPSP
Recipients under 65 years of age
- Life annuity payments from a registered pension plan
Spousal RRSPs still valuable planning tools
- Prior to the introduction of the pension splitting proposal the primary way that couples could split income during retirement was through the use of spousal RRSPs. While the new rules will make it easier for couples to split retirement income, spousal RRSPs can still be a valuable financial planning tool.
Advantages of Spousal RRSPs:
- For couples who plan to draw on their retirement savings prior to age 65, spousal RRSPs can be used to shift income to the lower income spouse. The new initiative makes it almost impossible for couples under 65 to split income.
- The new income splitting initiative only always the transfer of 50% of eligible income. A spousal RRSP has the potential to transfer more from retirement savings to the lower income spouse.
Phased Retirement
The 2007 budget now offers more flexibility to employers to offer phased retirement programs for its older workers. In effect, it allows an employer to offer an employee a partial pension of up to 60% of the employee's accrued “Defined” pension benefits while at the same time allowing the employee to accrue benefits in respect of post-pension commencement employment. This is regardless of whether the employee is working full-time or part-time.
Qualifying employees will be limited to individuals who are at least 55 years of age and who are otherwise eligible to receive a pension without the plan imposing an early retirement reduction. The 60% limit will be the amount of pension benefit that would be paid from the plan if the employee were fully retired.
New Age Limit for Maturing RPPs and RRSPs
Currently, taxpayers are required to stop contributing to their RRSPs at the end of the year in which they turn age 69 and then start a withdrawal program (RRIF). The 2007 budget proposes to extend this conversion to when the taxpayer reaches the age of 71. Individuals who turn 69 years of age in 2007 immediately benefit from the proposed change.
The measure will also benefit individuals who turn 70 or 71 years of age in 2007, in that if RRSP contribution room is available, RRSP contribution can be made in 2007 and 2008 for the 70-year-old and in 2008 for the 71-year-old.
RRSP Qualified Investments
Eligible investments for RRSPs have been expanded to include:
- Any debt or obligation that has an investment grade rating and that is part of a minimum $25 million issuance.
- Any security that is listed on a designated stock exchange.
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