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Navigating Taxes in the Senior Years

01/22/2015 05:12 EST | Updated 03/24/2015 05:59 EDT
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Older Canadians have many tools available to reduce their tax burden, but choosing how to use them can be complicated

Your golden years are about striking a balance between enjoying the free time you didn't have when you were younger and the challenge of living on a fixed income. Fortunately, the Canada Revenue Agency (CRA) has given seniors some tools to reduce their tax burden. But again, using these tools is a balancing act.

RRSPS DON'T STOP AT 65

Just because you've made it to 65 doesn't mean you have to stop working -- or contributing to your Registered Retirement Savings Plan (RRSP). As long as you have room, you can continue RRSP contributions until you're 71. Those contributions will only earn money for a few years but, if you are still in a senior position at your job and being taxed at a higher rate, they may still help. Another option is contributing to your Tax Free Savings Account (TFSA).

At the end of the year in which you turn 71, important decisions are due regarding the disposition of RRSPs. Do nothing, and the RRSP is considered by the CRA to have been collapsed and converted to income, which could result in a major tax bill.

This is why most decide to convert their RRSPs to a Registered Retirement Income Fund (RRIF) or an RRSP annuity. The annuity provides a stable, predictable income, but not much flexibility in the event you suddenly need money. A RRIF continues to accumulate tax-free but a pre-set minimum amount must be withdrawn every year no matter how your fund is performing. The withdrawals are reported as income on your tax return. If you need additional funds, you can access them but they will be considered income in the year you make the withdrawal.

SPLITTING PENSION INCOME

With pension splitting, moving enough income can result in a lower combined tax bill because it moves income into a lower tax bracket. This provides the most savings when one partner has the majority of the income. When both partners are taxed at the same rate it is less advantageous.

However, pension income splitting can impact other benefits or credits, because the lower-earning spouse now has taxable income. For example, nursing home fees based on income may rise if funds are moved to that spouse. And you can only go back three years to adjust pension income splitting amounts. So if you did not claim it for the last five years, you missed out on two years of savings.

ATTENDANT CARE, NURSING HOMES AND THE DISABILITY AMOUNT

The Disability Tax Credit (DTC) is non-refundable so it can only reduce tax owing, not generate a refund on its own. If one partner qualifies for the DTC and the credit is larger than the tax owing, the excess credit can be transferred to reduce the other partner's tax bill.

Living arrangements also can impact your tax situation. While it might sound callous to bring tax considerations into the decision of whether one or both partners receive attendant care, live in a nursing home or stay with adult children, the economic impact of that decision can touch quality of life for both.

Attendant-care costs--having a health care professional come to your residence to help with day-to-day activities for a few hours a week--can add up quickly. Living full-time at a nursing home can be even more expensive. There are tax considerations for each.

You have two options. You can claim up to $10,000 of attendant care expenses and also claim the DTC, or you can claim 100 per cent of attendant care costs. Generally speaking, if your attendant care costs are more than $17,000 you are better off not claiming the DTC.

If you are living in a nursing home you can claim the full amount you are charged as a medical expense. However, if you do so, you are not allowed to claim the DTC unless you restrict your claim to up to $10,000 of the nursing home fees that relate to attendant care. If you move late in the year, attendant care plus DTC may work out to be more generous. You do not have to claim the expenses the same way each year. But remember, independent living homes or retirement living centres don't qualify at all for a tax credit. It needs to be a nursing home.

Many seniors who have problems with independent living opt to move in with their adult children; about 10 per cent of middle-aged Canadians consider themselves members of the so-called Sandwich Generation, with caregiving responsibilities for both children and parents. This situation requires a family approach to managing the tax burden, because some credits can be transferred to a caregiving family member credit and some can't. For lower-income seniors, it might make sense for the caregiving children to pay for attendant care and other medical expenses so that they can claim the expenses. Since all of these credits are non-refundable, they are only of value to someone who owes tax.

It sounds complicated, and it is, just as many income tax issues are. Some decisions will make themselves, particularly with respect to living arrangements. Others require planning and calculation to settle in your favour.

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