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Fredericton Daily Gleaner ~ Capital Appreciation ~ Taxing Seniors ~ January 29, 2007 - 25 Feb 2007 by TaxHelp
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Last Halloween, in addition to the usual trick-or-treaters in the neighbourhood, a surprise was delivered by the government in Ottawa. And while it purported to deal with one thing – its by-product will have an affect on married seniors this tax filing season.
But first a brief history lesson. A number of years ago, income trusts as a business structure began to gain in popularity. Over the past five years they have become the organizational setup of choice. Many standard businesses felt that they could maximize shareholder return by minimizing profits within corporations in favour of dumping them out to a related trust. There was such a stampede in this market that all concerned felt that Ottawa was going to rein in their popularity. An announcement was expected and in the fall of 2005, then Finance Minister Ralph Goodale stated that there would be no changes to the tax structure of an income trust. Rather he would lessen the tax impact to the shareholders of large corporations.
You might recall that there was some hint that this announcement was leaked to interested parties and many politicos felt that it played an important role in the fall of the Liberals in the subsequent spring election. During that campaign, the Conservatives pledged to leave the taxation of these two types of organizations as they were. However, throughout last year we saw an ever increasing march to the income trusts where the taxation was more attractive. In fact, many of us can recall the move locally in the phone industry with the conversion and introduction of the Bell Aliant Regional Communications Income Fund.
On October 31 of last year Ottawa reversed their position in an effort to put a stop to this upheaval. Finance Minister Jim Flaherty announced that income trusts would no longer have the favourable tax status that they enjoyed to that point. For existing trusts he indicated that there would be a four year window for planning purposes. Secondarily to that announcement, Minister Flaherty also released changes in the area of taxation of seniors to help offset any distress that he might have caused.
We have probably received more calls on this subject than any other over the past few months. And today we are going to look at the changes as they apply to seniors in this area when they file their taxes this spring.
Most of the credits that are delivered to all taxpayers are non-refundable in nature. While they work if someone owes taxes, there is no separate side benefit if there is anything left over (forgetting about the transfers between spouses and other family members). Put another way, if you have $1,500 in non-refundable tax credits and you only owe $1,000, you are not entitled to a refund of the leftover $500. Usually these credits increase based on a formula tied to the rate of inflation each year, so that theoretically they are tax neutral.
That being said, the federal base Age Amount this year is now $5,066 – an increase of almost $1,100. This benefit is income tested and so it reduces the more the individual earns. Non-refundable credits for the 2006 tax year are calculated as 15.25 per cent in real dollars, so with this increase, a taxpayer saves a maximum of about $775 in their absolute tax bill.
Another credit being revisited this year is the Pension Income Credit. Originally designed to shield the first $1,000 of company pension or private retirement income, this has now doubled in value. While $2,000 sounds like a substantial deduction, as a credit this is worth a maximum of $305 against your federal income tax bill.
Not strictly for seniors, the large corporation dividend tax credit takes effect for 2006. Any one with significant dividend income is going to see massive tax savings in this area. People who own bank stocks and oil companies will not pay any tax if they are in the lowest bracket and only a slight amount in the middle levels. Those affected will be smiling all spring in this one area.
Finally, while this was announced on October 31, the long awaited seniors’ income splitting measures only take affect for the 2007 tax year. Basically, those 65 and older will be able to split company pensions and RRSP income with their spouses, effectively reducing the family income to the lowest combined tax bill possible. And who knows what the future holds? We might see an expansion of this and a big announcement in the capital gains area as early as the next federal budget, which is expected some time in March.
By the way, we still have a few times left for any group looking to have someone come out and offer a session where we discuss the newest tax changes. These events usually run somewhere around an hour once a question-and-answer is completed and are offered both during the day and evening. Most important, there is no charge for this service.
Roger Haineault is with Help 4 Taxes. He can be reached by email at roger@help4taxes.ca or by calling 1 (888) 450-1212. His column appears Mondays.
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