Trick or treat?: More on Ottawa’s tax changes

While much of Bay Street cries foul about tricks played on the income trust world, they’re overlooking a few tax policy treats that also came with the announcement, which are intended to soften the blow for seniors.

Although the “main event,” a distribution tax on income trusts and limited partnerships, is featured in most of the headlines today, the accompanying announcements about proposed personal income tax relief shouldn’t be overlooked. These proposals include an enhanced age credit for low- and middle-income seniors, as well as a change in tax policy that will allow income splitting for pensioners, beginning in 2007. These present some unique tax-planning opportunities.

“This is a major thing. The ability now for seniors to split pension income — whether it’s from a registered pension plan, an annuity, or a registered income fund after age 65 — I think that’s going to be a huge benefit that will save couples a lot of money,” says Jamie Golombek, vice-president, taxation and estate planning, at AIM Trimark Investments.

Low- and middle-income seniors will be eligible for a retroactive enhanced age credit, subject to an income test that targets the assistance to those who need it the most. The amount on which the age credit is computed will be increased by $1,000 to $5,066, effective January 1, 2006. Ottawa says this will provide eligible seniors with an additional $152.50 for 2006 in federal income tax relief. The credit begins to be phased out when net income reaches $30,270 and is fully phased out at $64,043.

The income-splitting provision, meanwhile, gives couples the opportunity to take up to 50% of their pension income — any income that qualifies for the pension credit — and elect to have it included on a spouse’s tax return instead, starting in 2007. Pension income includes annuity payments from a registered pension plan, RRSP, deferred profit-sharing plans or RRIF withdrawals.

As for the income trust taxation, Cynthia Kett, partner at Stewart & Kett Financial Advisors, says despite the headlines and market gyrations, client response to the news, so far, has been subdued. “I haven’t had any calls yet.”

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She adds: “Our clients tend to take things in stride. We’ve always said we consider [income trusts] to be equity investments. A lot of the businesses that have been converted into income trusts had very stable growth. Those were the ones that were best suited to being income trusts. For those businesses, for the most part, they’re not growth-oriented businesses, [but rather,] they have stable cash flows and they were able to make regular distributions; that should continue. Of course the taxation may be different, but they’ve just made changes to the dividend rules to put them on par with income trusts as well.”

“We always look at it based on whether or not these things make sense from an investment point of view and the tax stuff follows after. If they were good investments before and they continue to be good investments, then I would hold onto them. I wouldn’t get out of them now, just because of the change.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com

(11/01/06)

Kate McCaffery