Key tax strategies to consider

“[Pension income splitting] allows you to average out the income between two spouses to reduce the marginal rate [overall], and that’s actually quite a lucrative benefit, depending on the individuals’ [relative incomes],” says Alan Rowell, president of the Accounting Place in Stoney Creek, Ont., and an instructor with the Knowledge Bureau in Toronto.

If your senior clients have adequate income to meet their needs, putting off receiving their Canada Pension Plan (CPP) and old-age security (OAS) benefits also may make sense. For each month that individuals delay receiving their CPP and OAS between the ages of 65 to 71, those people receive an additional 0.6% in OAS benefits and 0.7% in CPP benefits.

“One of the things that we’ve been doing for some of our higher-income clients is melting down RRSPs at age 65, deferring government benefits to reduce that amount [from the RRSPs] that we do have to bring into income at age 71,” Rowell says.

There are several key tax credits that may be useful to your senior clients, at both the federal and provincial levels. In addition, many tax credits – such as the pension income credit or the disability tax credit – are transferable between spouses.

Here are several major federal tax credits of interest to your senior clients. (All amounts are for the 2014 taxation year.):

– Age amount

Your clients who were 65 years of age or older during the previous taxation year may claim a federal, non-refundable tax credit of up to $6,916. There is a reduction in the credit at a rate of 15% on net income above $35,466. At $82,352 and above, the age credit is phased out completely.

“If someone is in a situation in which the tax credit might start to be ground down, there may be ways to manage their income by claiming a deduction or doing something that could, on an ongoing basis, protect that credit,” says Murray Pituley, director of tax and estate planning with Winnipeg-based Investors Group Inc. in Regina.

In addition to the federal credit, every province has a corresponding age credit, although it may be reduced or eliminated at threshold amounts that differ from federal threshold amounts.

– Pension income amount

For clients aged 65 and older, there is a 15% federal credit available on up to $2,000 of eligible pension income annually. Eligible pension income includes payments from retirement pension plans, registered retirement income funds (RRIFs) and lifetime annuities from registered plans, among other sources. Note that RRSP withdrawals and government pension benefits, such as CPP and OAS, are not considered eligible income for this credit.

For clients younger than 65, income from registered retirement pension plans and eligible pension income that is received as a result of the death of a spouse may qualify for the pension income credit.

In scenarios in which a senior client between the age of 65 and 71 does not have eligible pension income, converting a part of his or her RRSP into a RRIF may make sense. Payments from the RRIF would generate eligible income for the pension income credit.

– Disability tax credit.

Taxpayers of any age are able to claim the disability tax credit if they qualify. This credit may be of particular interest to seniors because they are more likely than people in other age groups to be dealing with one or more medical issues.

To qualify, an individual must be living with a severe and prolonged impairment – defined as an impairment that markedly restricts the individual from a basic activity of daily living – that has lasted or is expected to last at least a year. The rules governing the disability credit are outlined fully in the Canada Revenue Agency’s Form T2201.

Clients may qualify for this credit even if they don’t meet the criteria of being markedly restricted in any one activity if they are living with several ailments that together equate to being restricted under the rules.

“People often aren’t aware that they qualify for the disability tax credit,” Pituley says. “The take-up rate for this credit is not as high as it could or should be.”

The amount of the non-refundable tax credit is $1,165.

– Medical expense credit.

As with the disability tax credit, the medical expense tax credit may be of special interest to seniors.

Medical expenses greater than 3% of an individual’s net income, or $2,171 (whichever is less), can be claimed for a federal tax credit of 15%.

Remind your senior clients that they may combine their medical expenses, for the purposes of the credit, with those of their spouse on one tax return. Although having the lower-income spouse claim the expenses usually is best because the 3% threshold will be easier to meet, he or she would have to have taxes payable against which to claim the credit in order for that strategy to be effective.

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