2019 Federal Budget

David Christianson, BA, CFP, R.F.P., TEP, CIM

“Dollars and Sense”

Tuesday’s Federal Budget had a number of small goodies aimed at encouraging votes.  Over the next few months, we will provide tips for how you can get your share of the largesse. Today’s focus is on a review of income tax basics. After all, it’s that time of year!

Speaking of taxes, remember that there is a new refundable credit in Manitoba, called the Climate Action Incentive, worth $170 a person, or $225 per couple. With a 10% bonus for rural residents. Claim it.

Tax Credits & Tax Brackets

A number of tax reductions come in the way of credits, as opposed to deductions.  Deductions (like RRSP contributions, investment counsel fees, interest on investment loans) reduce taxable income, and save tax at your marginal rate. This means a deduction is worth more to someone in a high tax bracket, because they are being taxed at a higher marginal tax rate. This is the rate paid on the last dollar earned. It will be higher than your average overall tax rate.

For example, a $1,000 RRSP contribution reduces taxable income by $1,000.  A person with taxable income of $98,000 is being taxed at 43.30% on the last dollar in Manitoba, so the contribution will save $433 in taxes. A person with taxable income of $35,000 was being taxed on the last dollar at “only” 27.75%, so the tax saving is $277.

By the way, since rates keep increasing until reaching 50.40% on incomes above $210,000, it means that 2.7% of taxpayers pay 32.6% of all personal income taxes in Canada. This group earns 17.5% of all taxable income, according to CRA. 

Tax credits work differently, usually calculated at that lower rate for all taxpayers. 

However, many credits are income-tested, which means they disappear on the tax returns of higher income earners.  As well, some credits are “non-refundable”, only reducing tax to zero, not creating a refund for someone who is not paying tax.

Examples of credits are those for paying CPP and EI premiums, medical expense credits and charitable donations. The reduction in tax is the same for everyone, regardless of marginal tax rate.

“Seniors”

When a person reaches 65, a number of tax credits and advantages kick in. The Age Credit (line 301) provides a non-refundable tax credit of 15% federal (27.75% combined federal and provincial), as long as net income is below $37,790.  Above this, the credit is reduced until it disappears at net income of $85,863.

With income-tested credits, keep in mind that the taxable portion of capital gains and the taxable (grossed-up) amount of dividends will all add to net income.

The Pension Income Credit allows a 27.75% tax credit on the first $2,000 of qualifying pension income each year. This includes income from a company pension at any age, and periodic income paid from a RRIF, LIF or annuity starting at age 65. If you are not receiving income from a pension and you reach 65, you can create qualifying pension income by converting a RRSP (or LIRA) to a RRIF (or LIF).

This credit offsets the tax paid on this amount in the lowest tax bracket. If a person is in a higher tax bracket, then some tax will still be payable on this $2,000 of pension income, that being the differential between the lowest bracket and the taxpayer’s actual marginal tax rate.

Budget Proposals

Current rules require RRSPs, DPSPs, and pension plans to be converted into an income-producing vehicle by the end of the year in which the owner turns 71. These vehicles include RRIFs, LIFs and annuities.

Some people have other assets or income and would prefer not to convert, as it creates taxable income. There is potential good news in this Budget for those people. 

If they are willing to convert to an annuity as the income vehicle, a new thing called an Advanced Life Deferred Annuity (ALDA) can be chosen for up to 25% (maximum $150,000) of the annuity amount, with the income on this ALDA deferred until age 85. 

For people who are members of pension plans, a new income option is proposed.  This is a Variable Payment Life Annuity (VPLA), where the actual income paid will be based on investment performance and mortality expectations.

I am tempted to say we do not need more alphabet soup when it comes to retirement options, but these ones sound positive.

Happy first week of spring!

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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.

Please consult legal, tax, insurance and investment experts for advice on your unique situation.

David Christianson, BA, CFP, R.F.P., TEP, CIMis recipient of the Fellow ofFPSCTM Distinction, and repeatedly named a Top 50 Financial Advisor in Canada.  He is a Portfolio Manager and Senior Vice President with Christianson Wealth Advisors at National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.