Many seniors invested heavily in income trusts say Ottawa’s plan to buffer them from its changes to the trusts by increasing the age credit amount and allowing pensioner couples to split income will not make up for the income stream they were expecting. The measures will also discriminate against some pensioners in the way they are applied.

Starting in 2007, pensioners will be able to split income. The age credit amount will be increased by $1,000 — to $5,066 from $4,066 for the 2006 tax year.

The changes are not going to create income, says Heather Evans, partner and tax lawyer with Deloitte & Touche LLP in Toronto. In a low interest rate environment, many seniors had invested in income trusts for the highly touted income stream that was promised.

“Fixed-rate investments don’t provide much income. Seniors liked income trusts a whole lot,” says Evans. “But many of them were exposing themselves to a lot of risk without realizing it.”

The outcry shows how overexposed seniors were to the income trust sector, she adds.

“For someone who had $200,000 invested in income trusts, and he or she is down 20%, clearly, income-splitting is not going to make up for the $40,000 loss in the portfolio,” says Jamie Golombek, vice president of taxation and estate planning at Toronto-based AIM Funds Management Inc. For seniors who have had “good advice — a diversified portfolio,” the picture will be brighter, he adds: “Hopefully, they’ve chosen income trusts that will do well in the long run.”

Golombek and Evans point out that the proposed new taxes to be imposed on income trust distributions will not be applied until 2011. Meanwhile, however, there are some inherent problems with the way Ottawa has chosen to soften the blow for seniors.

The enhanced age credit will be subject to a clawback, says Golombek. Therefore, a client’s level of retirement income will determine the usefulness of the credit.

Meanwhile, the income-splitting measure will not be any use to a single senior, or to a couple in which both partners are in a high tax bracket, says Evans.

A couple with one partner in a high bracket and the other in a low bracket, says Golombek, will find the announcement as generally good news. Golombek notes, however, that the income-splitting announcement is perpetuating a discriminatory glitch that exists in the federal Income Tax Act.

The new measure is based on the rules that presently govern the application of the pension credit. A taxpayer is entitled to a federal tax credit for 16% of his or her pension income up to $2,000. The credit is available to taxpayers under age 65 if their pension income comes from a private source, such as a former employer. But the credit is not available to pensioners drawing on an RRSP or RRIF until they reach 65.

Ottawa is adopting the “same set of rules” for the new income-splitting measures, says Golombek. “Why should someone who is 60 or 55 with private pension income be able to get the credit, and someone the same age who has an RRSP or RRIF not be able to do so?”

Notes Golombek: “It’s a policy concern that has always been around.” IE