Income taxed on Seniors
By Nizam Shajani, CPA, CA, MBA, Partner
There are varying sources of income you may receive in your retirement years. Understanding these sources and how amounts are calculated will help you plan for the related taxes due on receipt of this income. One significant consideration is the splitting of pension related income between senior spouses to utilize each individual’s lowest tax bracket.
A Retirement Allowance (or severance pay) is a payment made to employees when they retire from employment for recognition of long service or as compensation for the loss of employment. A combined tax rate of 30% on amounts over $15,000 must be withheld by the employer and remitted as tax withheld on behalf of the employee – CPP and EI are not deducted on this calculation. To save on this potentially large tax event, all or part of the retirement allowance may be transferred to a registered pension plan (RPP) or a registered retirement savings plan (RRSP). The eligible portion for transfer includes up to $2,000 per year for services prior to 1996 and an additional $1,500 for services prior to 1989. Also, a non-eligible portion may also be transferred to your RRSP and depends on the contribution room available in your RRSP.
Other Pensions and Superannuation are pensions from Canadian or foreign sources. These pensions can be split with your spouse or common law partner to achieve tax minimization through income splitting.
Annuity Payments are received on a regular basis from a plan such as a general annuity, a payment from a registered retirement income fund (RRIF) or a variable pension income. These amounts are taxable
The Canada Pension Plan provides you with a partial replacement of earnings when you retie. The maximum benefit at age 65 for 2017 is $13,370 ($13,110 for 2016) and paid monthly, however the average amount of CPP payouts are closer to $7,780. The actual amount received from CPP is based on the amount of CPP contributions made in your working years and the number of years’ contributions are made during your eligibility. The amount receive are considered taxable income.
The first consideration for the maximum CPP benefit is contributing for the maximum number of years during eligibility. You are eligible to contribute to CPP from ages 18 through 65. Of those 47 years, 83% is used as the base for maximum contributions – resulting in 39 years of contributions made.
The second consideration to receive the maximum CPP benefit is contributing the maximum amount of contributions to CPP. Each year CPP provides the yearly maximum pensionable earnings. For 2017, this is based on income of $55,300 ($54,900 for 2016). You would have to make more than the yearly maximum pensionable earnings to make the maximum contribution.
If you have 39 contributions of the yearly maximum pensionable earnings amounts – you should receive the maximum benefit. As can be seen – this is not easy to achieve. To determine the amount of CPP you qualify for, call Service Canada at 1-800-277-9914 and ask for your CPP Statement of Contributions.
Old Age Security is an insurance program that guarantees a minimum pension income to individuals over the age of 65. The social payout is available to anyone over the age of 65 making less than $74,788 in 2017 ($73,756 for 2016) on the calculation of their net income before adjustment. For those making more than that amount, 15% of the excess amount will have to be paid back and your OAS benefit is completely eliminated when your income reaches about $119,400.
The amount you are eligible for is calculated based on the number of years you have lived in Canada after the age of 18. The benefit is adjusted quarterly based on the cost of living measured by the consumer price index. Any clawback is calculated on your personal tax filings and added back as a social benefit repayment.
To preserve your OAS eligibility, income sources should be considered. For instance, dividend income may be grossed up by 138% for the purposes of calculating taxable income. This gross up may result in an OAS claw back. Capital gains before application to any capital losses may also affect OAS eligibility, although capital dividends do not affect your OAS.
The Guaranteed Income Supplement provides a non-taxable to OAS pension recipients who have low income and are living in Canada. Your annual income must be below the maximum threshold (or in the case of a couple, the combined income must be below the threshold). The thresholds vary based on circumstances - a single, widowed or divorced person may receive $856 per month if their income is below $17,376; A married person who’s spouse is also receiving OAS may receive $515 per month if their family income is below $22,944; a married person who’s spouse is not receiving OAS may receive $856 per month if their family income is below $41,664; A married person who’s spouse is also receiving OAS as well as the allowance may receive $515 per month each if their family income is below $32,160. Note these amounts change quarterly.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action.