Tax changes that work for you
Almost every year, the federal government announces tax changes that can have a beneficial impact on Canadians. Sometimes these changes directly affect every Canadian, such as the GST reduction from 6 to 5% in 2008. However some of the changes are not so obvious and do not necessarily apply to everyone, such as extending the maximum RESP contribution period from 25 to 35 years.
Tax-Free Savings Account (TFSA)
The new Tax-Free Savings Account (TFSA) is designed to help Canadians save for important goals and reduce their overall tax bill. Starting in 2009, Canadians aged 18 and older can save up to $5,000 every year in a TFSA.
Some key highlights include:
- Contributions to a TFSA will not be tax deductible, but investment income, including capital gains, earned in a TFSA are not subject to tax, even when withdrawn.
- Unused TFSA contribution room can be carried forward to future years and the amount withdrawn can be put back in the TFSA at a later date without reducing your contribution room.
- Funds can be withdrawn from the TFSA at any time for any purpose and neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.
- Contributions to a spouse’s TFSA will be allowed and TFSA assets can be transferred to a spouse upon death.
- Generally, the same rules apply to the TFSA as to the RRSP when it comes to determining eligible investments.
Pension Income-Splitting
Canada’s income tax system generally requires each individual taxpayer to report and pay tax on all of the income they earn. Since individual tax rates rise as taxable income passes from one tax bracket to another, a spouse in a higher tax bracket will usually pay more tax on their income than their spouse who is in a lower tax bracket.
As of 2007, those individuals who receive income that qualifies for the existing federal pension income tax credit are able to allocate up to one-half of that income to a spouse or common-law partner living in Canada. For those individuals aged 65 years and over, eligible pension income includes:
- lifetime annuity payments under a registered pension plan (RPP) or a foreign pension plan;
- lifetime annuity payments under a registered retirement savings plan (RRSP) or a deferred profit-sharing plan (DPSP);
- payments out of or under a registered retirement income fund (RRIF), a life income fund (LIF), a locked-in retirement income fund (LRIF) and a prescribed retirement income fund (PRIF); and
- the “interest” component of the payments under an annuity contract purchased with non-registered funds.
Periodic payments from a RPP also qualify for pension income splitting even if the recipient is less than age 65.
Other important details with respect to pension income splitting are as follows:
- The pension income credit may be available for both spouses. (The federal credit is calculated on the first $2,000 of eligible pension income received.)
- Pension income-splitting could mean higher Old Age Security (OAS) benefits for some couples. A recipient of OAS whose net income exceeds a “threshold” amount ($ 64,718 in 2008) is subject to a clawback of the benefits. If a portion of the person’s pension income is allocated to a spouse, the allocated amount will be deducted from the pension recipient’s net income. As this deduction would lower the recipient’s adjusted net income, the result could be that less income would be subject to the OAS clawback.
Wait, there’s more…
Here are some other general changes that have occurred in the past year:
- The basic personal exemption (i.e. the amount that individuals can earn without paying federal tax ) was increased from $8,929 to $9,600 for 2008. The amount will be increased to $10,100 for 2009.
Speak to an Investors Group Consultant for more information on tax changes that may be good for you.
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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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