Retirement Income
The Canadian federal budget for the 2007-2008 fiscal year was presented to the Canadian House of Commons by Finance Minister Jim Flaherty on March 19, 2007. The budget comes into force when it passes the second and third readings in the House and Senate and receives Royal Assent. The Senate could defeat the budget, but has never voted down a budget bill in the past. I have summarized and touched on a few areas outlined in the budget that pertain to your investments.
Retirement Income Splitting
What is retirement income splitting?
It’s the ability to transfer income between spouses or common-law partners in order to lower total taxes payable. Income splitting is one of the most powerful options retired couples have to reduce their overall tax burden. As with other strategies, the goal isn’t simply to produce short-term savings but to minimize taxes throughout retirement.
One of the best pieces of news for retirees in the federal budget is the inclusion of the retirement income splitting measures the government fi rst introduced last October. The government is allowing Canadian residents with income that qualifi es to allocate up to half of that income to a spouse or common-law partner.
For people 65 years or older, eligible income includes lifetime annuity payments made under a Registered Pension Plan (RPP), Retirement Savings Plan (RRSP), Deferred Profi t Sharing Plans (DPSP) and payments derived from Registered Retirement Income Funds (RRIF).
Well you may be asking yourself, what about our spousal RRSP that we have started?
Income Splitting vs Spousal RRSP
Retirement couples can also balance their income levels through a spousal RRSP. One spouse makes contributions and takes the tax deduction and the other reports the income. This is used as a long-term planning strategy. Once a contribution is made to a spousal RRSP, the recipient must generally wait up to 3 years before making a withdrawal or the contributor pays the tax.
Even so, as an income splitting mechanism, spousal RRSPs have some advantages over the new measures announced in the federal budget. A spousal RRSP creates a stream of income that is fully taxed in the hands of the lower income partner. Under the recent tax changes, only 50% of the income from pensions and non-spousal retirement savings can be split. In addition, retirement income splitting under a spousal RRSP can begin before 65, while the new rules for RRIF payments and spousal RRSP annuities require that the higher income spouse be at least 65 years before retirement income splitting may begin.
RESP Changes
The government implemented two major changes to the contribution rules for the Registered Education
Savings Plan (RESP): The elimination of the $4,000 annual RESP contribution limit and the increase of
the lifetime RESP contribution limit to $50,000 from $42,000.
The ability to lump-sum fund an RESP for a child’s post-secondary education may outweigh the benefits of collecting the annual Canada Education Savings Grant (CESG). The CESG rules are also changing. The
maximum annual RESP contribution that will qualify for the 20% CESG will increase to $2,500 from $2,000, thereby increasing the maximum annual CESG per benefi ciary to $500 from $400.
The maximum lifetime CESG limit was unchanged and will remain $7,200.
RRSP Age Limit Increase
The age limit in which Registered Retirement Savings Plans (RRSPs) and Registered Pension Plans (RPPs) must be converted into either a Registered Retirement Income Fund (RRIF) or an annuity has been increased to age 71 from 69. This immediately benefi ts anyone who turns 69, 70 and 71 in 2007 by allowing them to delay conversion of their retirement plans by an additional 2 years.
Assuming the 70 or 71 year old has RRSP contribution room available that was never used before turning 69, a new RRSP could be opened this year to shelter contributions from income tax and provide a tax deduction on a current or future year’s tax return.
Also, the 70 or 71 year old could transfer their existing RRIF back into an RRSP as long as it’s converted back at the end of the year in which they turn 71. For those whochoose not to convert back into an RRSP, the government will wave the minimum withdrawal requirement from those who turn 70 or 71 in 2007.