The Canadian income tax system is based on combined Federal and Provincial graduated tax rates. The following table shows the 2007 combined rates for British Columbia.
Splitting Pension Income The latest federal budget will allow pension income to be split between spouses. This will allow for considerable tax savings for couples with retirement pension income that is mostly in one spouse’s name. Based on 2006 tax rates a couple with pension income of $40,000 and $20,000 respectively plus OAS can now report $30,000 each and save about $500 a year in income tax. A couple with pension income of $80,000 and $20,000 respectively plus OAS would have a combined tax bill of $26,509. Splitting the income would reduce the income tax to $22,911: an annual tax saving of $3,598.
Pension income is defined as pension income, Registered Retirement Income Fund (RRIF) income, Life Income Fund (LIF) and Registered Retirement Savings Plan (RRSP annuity income. Old Age Security (OAS) and Canada Pension Plan (CPP) do not qualify under this provision. CPP is already subject to an income splitting mechanism.
Delaying the conversion of RRSPs Currently RRSPs must be converted to a RRIF by the end of the year in which you turn age sixty nine (69) and a minimum amount must be withdrawn the following year at age seventy. The amount of the withdrawal is of course subject to income tax. The new budget allows the conversion to be delayed until age seventy one (71) thereby giving taxpayers two additional years of tax shelter. Taxpayers who are currently between the age of sixty-nine and seventy-one will have the option of rolling-back their RRIF back to an RRSP. The rules for roll-backs are pretty dense and your financial institution must have the capacity to accommodate it. Pension Income Credit Taxpayers who receive pension income are eligible for $2,000 of tax-free income at the lowest tax bracket. This is an annual saving of $424 or $848 for a couple. CPP and OAS income do not qualify for this credit. If you or your spouse do not have qualifying income such as a pension from a previous employer, you can create qualifying income by rearranging your investments.
