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Fredericton Daily Gleaner ~ Capital Appreciation ~ Senior Splits ~ November 6, 2006 - 29 Nov 2006 by TaxHelp
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As the saying goes, “timing is everything!” Last Monday afternoon I was chatting with Paul Castle on CBC Radio’s afternoon drive show ‘Shift’ about a potential tax change that could be enacted. Regular readers know that we have looked at the income trust movement here in this space on a number of occasions, with a suggestion that the whole matter was probably going to be revisited by the feds. Coincidentally, Paul and I also looked at the area of income splitting for seniors at the time.
For a number of years, Garth Turner, MP for Halton and currently sitting as an Independent, has championed the issue of perceived unfairness in the area of senior taxation. Before his life in politics Mr. Turner was a financial commentator with his finger on the tax and investing community. Previously in response to a question from Mr. Turner, Federal Finance Minister Jim Flaherty indicated that he was considering the allowance of senior couples to split pension income for tax purposes.
A number of years back the Canada Pension Plan began to allow couples the opportunity to split payments out of the program. While this may have limited benefit for very low income seniors, it certainly makes a difference for anyone who has additional retirement income. That’s because the tax we pay is based on how much we make – the more, the more! By transferring some of the income into the lower earning spouse’s hands, a couple can reduce the total tax liability.
For those beginning to take their CPP at age 65, the maximum amount of retirement benefit is slightly more than $10,000. In addition, there is the Old Age Security which pays just under $6,000 in 2006. A couple that each received OAS and with one of the spouse’s qualified for maximum CPP and a pension from employment of $25,000 paid a combined total tax of $6,474 in 2005. By splitting the CPP payment with the lower income spouse, the combined tax bill was lowered by more than $75 a month. By further splitting the employment pension, the total family tax bill would be less than $5,000.
Some people might question whether this is fair. An argument could be made that we need to look at the sociological structure of those in retirement. While it is less common today to see the traditional nuclear family of the dad out working and the mom home with the kiddies, indeed this is the case for many of the folks currently in retirement. While there has been a long on-going debate on whether stay-at-home parents should be entitled to contribute to CPP, the answer is currently no. For others, when the kids are older, often the returning to the workforce parent is too late to pick up with a career that has significant retirement benefits, and have only their CPP (which does have a child rearing drop out component) to count on. Family practice lawyers continually make the case that these types of assets should be split upon marital breakdown. Splitting retirement income from a tax perspective just extends the argument and allows more money to be left in the home, when the ability to earn any substantial income has ceased – a position I believe most Canadians would deem to be fair.
While it would be a legislative nightmare to try and get all the affected stakeholders on side – pension providers, legislators, RRSP carriers to name but a few – the same result could be accomplished by a relative simple administrative change directly on the tax return, much like the way investment income is reported.
Anyway, in what appears to be a case of coincidental prediction, the day after the radio interview Mr. Flaherty announced changes to the way that income trusts are going to be taxed, thereby negating (albeit over four years) advantages that trusts like the Bell Aliant Regional Communications Income Fund are going to have over their corporate cousins. He also introduced rule changes allowing retirees to split their retirement income. While no doubt this will help offset any negative affects to this group as a result of the trust changes, it will also be extremely welcomed by the non-investor as exampled above.
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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