乌鸦传媒

Prior to our clients turning 65, we have a discussion with them about both the age amount and the pension income amount which are both federal non-refundable tax credits. For new clients that are 65 or older, we will also ensure we have a discussion about both of these amounts and how they are integrated into pension splitting throughout retirement. This conversation is particularly important for our clients who do not have a registered pension plan from a previous employer.

Age amount

Individuals who are 65 and older may be able to claim the age amount. The age amount is income tested very similar to Old Age Security (OAS). The maximum age amount in 2020 is $7,637. The age amount is indexed annually to inflation. For example, last year the age amount was $7,494 (2019).

The age amount in 2020 is reduced by $0.15 for every dollar earned over $38,508 and is fully eroded when income reaches $89,421. The age amount is multiplied by the Federal non-refundable tax credit rate of 15 percent.

To illustrate, we will use three different income levels: Client A has annual income of $30,000, Client B has income of $65,000, and Client C has income of $130,000.

Client A would qualify for the full age amount as their income of $30,000 was below the bottom threshold of $38,508. The full age amount of $7,637 would be reported on Line 30100 of the tax return. This, ultimately, would be subtotaled with other non-refundable credits. To make this illustration simple, we would assume no other non-refundable credits. The $7,637 would be multiplied by the 15 per cent Federal tax credit rate and translate into tax savings of $1,145.55 for the age amount.

Client B would qualify for a partial age amount, given their income of $65,000. To calculate, you would take the difference between $65,000 and $38,508 = $26,492 x $0.15 for having excess income = $3,973.80. The full age amount of $7,637 would be reduced by $3,973.80 to equal $3,663.20 age amount. The $3,663.20 would be multiplied by the 15 per cent Federal tax credit rate and translate into tax savings of $549.48 for the age amount.

Client C would not qualify any age amount as the income of $130,000 exceeds the maximum threshold of $89,421.

We discuss with clients how one tax decision may impact other elements. For example, let’s use a retired couple, both 65 and older, where the higher income spouse is making $130,000 annually (similar to Client C above) with private pensions, CPP, OAS, and investment income. The lower income spouse is making $30,000 (similar to client A above).

When it comes time to do annual taxes, one must consider all options, including pension splitting and other benefits such as OAS. In 2020, the OAS repayment threshold is set at $79,054.

In looking at the eligible pension income, the higher income spouse could income split $35,000 of eligible pension income to the lower income spouse. The lower income spouse’s income would rise from $30,000 to $65,000 (similar to Client B). The higher income spouse’s income would drop from $130,000 to $95,000. The higher income spouse would be able to receive a greater portion of OAS, and some of the income would be taxed at a lower rate when included on the lower income spouse’s tax return.

The lower income spouse will not receive the full age amount with the pension split outlined above. The non-refundable tax credit would be reduced from $1,145.55 to $549.48. This represents a loss in tax savings on the age amount of $596.07 as result of pension splitting. Normally, pension splitting makes sense and, despite losing a portion of the age amount, as shown in this example, the income tax savings from splitting pension income would be greater than the amount lost.

Pension income amount

With the pension income amount, individuals receiving eligible pension, superannuation or annuity payments can claim the pension income amount annually. Generally, the eligible pension depends on the type of income and/or the age of the pensioner. For example, Registered Pension Plan payments are considered ‘qualifying pension income’, regardless of the recipient’s age. On the other hand, Registered Retirement Income Fund (RRIF) withdrawals only qualify as eligible pension income if the recipient is at least 65 years of age, or the amounts are received due to their spouse’s death. Old Age Security, 乌鸦传媒 Pension Plan, death benefits, and retiring allowances do not qualify for the pension income amount.

The pension income amount is claimed on line 31400 of your tax return. Similar to the age amount, the pension income amount is a non-refundable tax credit. In 2020, you are entitled to a Federal non-refundable tax credit of 15 per cent of the pension income amount (to a maximum of $2,000). This essentially translates into a $300 annual Federal tax savings ($2,000 x 15 per cent).

Individuals who are younger than 65 generally are not eligible for the pension income amount. The two main exceptions for individuals younger than age 65 include: payments from a Registered Pension Plan (provided they are life annuity and not lump sum payments) and annuity payments arising from the death of your spouse under a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), Deferred Profit Sharing Plan (DPSP) and other specified plans.

If you are at least 65, then the following represents some of the main types of pension income that may be considered: annuity payment out of a RPP, RRSP or a DPSP; payment out of a RRIF; interest component from a prescribed annuity; or accrual income included in respect of non-exempt life insurance policies and non-prescribed annuities.

To get the maximum pension credit, your goal should be to have at least $2,000 of eligible pension income for both you and your spouse (assuming your spouse is also at least 65 years old). The following are a few strategies to consider:

Strategy 1: If you and your spouse do not have a pension, then you should consider creating a small one. If you are older than 71, but your spouse is younger than 71, you may be able to create pension income. This can be achieved by opening a spousal RRSP and making a contribution to the plan. This assumes that you are able to utilize the RRSP contribution deduction and you have RRSP carry forward room. When this income is withdrawn as an annuity payment, the pension income created may be eligible for the pension income amount (up to $2,000 annually).

Strategy 2: Although there are restrictions that may apply, if your spouse has eligible pension income but is not able to utilize the pension credit because their tax payable has been reduced to nil by using other tax credits, you should transfer the unused portion of their pension income credit to you.

Strategy 3: If you do not have any qualifying pension income, are age 65 or over, and do not want to draw down your registered assets at this time, you could consider purchasing a non-registered Guaranteed Income Annuity (GIA) from a life insurance company. Note: this is very similar to a Guaranteed Investment Certificate (GIC). The deposit should be enough to produce $2,000 of interest income and this income will qualify for the pension income amount. The reporting of the income is done on a “policy year” basis rather than “calendar year,” so it is important to determine the best time to purchase these.

Strategy 4: Roll a portion of your RRSP to a RRIF at age 65. If your RRSP is $200,000 then you may want to consider transferring $50,000 of this amount to a RRIF at age 65 (see chart below) and keeping the remaining $150,000 in your RRSP. The following chart outlines possible transfer amounts from an RRSP to RRIF that may create $2,000 of pension income in the first year:

Strategy 5: Individuals without a registered account may want to consider purchasing an annuity. Annuities purchased outside of an RRSP are taxed on the prescribed basis. This means that a portion of the annuity income payment is considered a return of capital and the remainder is interest income. The annuity purchase should be sufficient to produce $2,000 of interest income annually.

Strategy 6: Individuals that are 65 years old with an RRSP may want to consider transferring a portion of their RRSP into an annuity. Annuities purchased with funds from a registered account create an income stream that is fully taxable. As a result, a smaller amount from a registered account (compared to a non-registered account) would enable people to fully utilize the pension income amount.

Strategy 7: Individuals converting their RRSP to a RRIF at age 71 are not required to make a minimum payment in that first year. It may be prudent for some individuals to make a $2,000 withdrawal during the first year to utilize the pension income amount.

Individuals who have not reached the pension age yet may still find the above advantageous for planning purposes. Others between ages 65 and 71 should determine if their household is fully utilizing the pension income amount. Some households may find that they are able to offset up to $28,000 of income with the pension income amount over a seven-year period ($2,000 each for 7 years). This simple tip translates to our clients saving $4,200 ($28,000 x 15%).

Before implementing any strategies discussed above, we recommend that you speak with your Portfolio Manager and tax advisors to determine which strategy, or combination of strategies, you can benefit from the most.

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138.