The Government of Newfoundland and Labrador is following in the federal government’s footsteps, announcing that the province is allowing income-splitting for pensioners in the 2007 taxation year. The impact of this new tax-savings measure is expected to be significant in Canada’s youngest province.

“There will be very substantial savings for taxpayers in New-foundland and Labrador,” says Don Drummond, senior vice president and chief economist with TD Bank Financial Group in Toronto. Those savings are linked to two factors: the provincial tax brackets and the province’s aging population. “You take a bite out of the progression of the tax structure,” he adds. “If you can ram some income down into the lower tax rate, there are savings.”

In Newfoundland and Labrador, there are three income tax brackets: individuals who earn less than $29,590 pay a rate of 10.57%; individuals who earn $29,590-$59,180 pay 16.16%; and those who earn more than $59,180 pay 18.02%.

Alberta, on the other hand, has just one tax rate, 10%; British Columbia has five brackets, ranging from 6.05% for income of $33,755 or less to 14.7% for income of $94,121 or more.

In practical terms, this means taxpayers in Newfoundland and Labrador have more to gain from income-splitting than many other Canadians. And because the overall tax rate is higher here than in most other provinces, reducing income to a lower tax bracket has more direct impact on the bottom line because there may be noticeably less money flowing out the door. As well, because the increases between the brackets are steep — especially between the first two — paying at a lower rate has added value in terms of money saved.

In demographic terms, New-foundland and Labrador is home to approximately 66,300 seniors, roughly 13% of the total population. Statistics Canada predicts that by 2021, more than 25% of people in the province will be 65 years of age or older, the highest proportion of seniors in Canada.

For the province’s pensioners, as is the case elsewhere in the country, income-splitting will create an equal playing field, says John Hanrahan, president and CEO of Halifax-based Citadel Securities: “There is no reason in the world why one spouse doing well should have to pay more taxes than two people living together.”

Citadel will serve clients across Atlantic Canada once the firm completes the Investment Dealers Association of Canada registration process it is undertaking.

When the general benefits of income-splitting are combined with the unique Newfoundland and Labrador economic landscape, the result will probably be increased interest — and inquiries — from the public, says Doris Sacrey, a financial planning consultant with Manulife Financial Corp. in Labrador City.

Sacrey’s client base in the town of 8,000 is predominantly over the age of 50 and employed by one of the major mining companies in the area. The majority of residents will certainly understand the positive implications of income-splitting, she notes: “I expect to get calls and questions.”

But Sacrey believes she is on her own when it comes to ans-wering those questions. The provincial government has provided no details of the provincial income-splitting policy, and did not give financial planners and advisors a heads-up that the announcement was coming. “I’m thinking the only thing we will know is what we investigate on our own,” she says.

It is expected that the New-foundland and Labrador government’s income-splitting scheme will fully mirror that of the federal government, which will allow any Canadian aged 65 years and older who receives pension income — or someone under 65 with an annuity from a registered pension plan — to allocate up to half of that income to their spouse.

For seniors over 65, eligible pension income will include lifetime annuity payments under registered pension plans, RRSPs or deferred profit-sharing plans and payments out of or under RRIFs. For anyone under 65 years of age, eligible pension income includes lifetime annuity payments under an RPP and certain other payments received as a result of the death of the individual’s spouse.

In addition to being taxed at a lower rate, pension income-splitting also allows senior couples to profit more from non-refundable tax credits such as the basic amount, age amount and pension income amount, says Drummond. In turn, these tax credits lower a couple’s taxes.

Ironically, the provincial government’s announcement was not necessary. The province has little choice but to follow in Ottawa’s footsteps, says Drummond. As a signatory to the Federal/Provincial Tax Collection Agreements, Newfoundland and Labrador must adhere to all federal tax regulations and requirements. (Quebec is the only province that is not part of the agreement.)

@page_break@In fact, all Canadian provinces and territories — except Quebec — will be required to allow income-splitting for pensioners when the new federal legislation is enacted. (Quebec has announced that it will also allow income-splitting.) And, like Newfoundland and Labrador, New Brunswick and Prince Edward Island have also announced they are welcoming the move.

In the meantime, the federal legislation has not been readied, although it is expected to be in place later this year. This lack of movement may explain the Newfoundland and Labrador government’s reluctance to talk about the new tax measure.

In a Nov. 20, 2006, news release, the province’s then-Finance Minister, Loyola Sullivan, stated that the province’s pre-emptive move “is a significant tax benefit for senior couples, particularly when there is a single earner or the income of one of the spouses is greater than the other’s.”

But when asked to expand on these benefits, provincial Finance director of communications Deb-orah Pennell says: “That was a federal announcement. While we followed suit, we’re just going to leave it to the federal government.” IE