For many people, it’s time to start thinking about the Christmas season. Decorations are starting to hit the streets, malls and even people’s homes. Before you know it, Christmas will have come and gone and we will be heading into another new year.
Financially, there are some important strategies to think about this time of year too. Although taxes may not be on our minds, some key strategies require your action before the end of the year instead of waiting till the April 30th deadline when you have to file your returns. By that time it will be too late to do anything.
1. RRSP age limit changed to age 71. The 2007 budget moved the RRSP conversion age from age 69 to age 71. If you turn 69, 70 or 71 this year, you must pay particular attention to your RRSPs since all financial institutions have implemented special rules to deal with the change. Check with your financial institution for specifics.
If you turn 69 in 2007, and you have not already moved your RRSP to a RRIF or annuity, you do not need to do anything. You can convert the RRSP to income anytime up to the end of the year in which you 71 if you choose.
If you are age 69, 70 or 71 in 2007, and you have already converted an RRSP to a RRIF prior to the new legislation, you can stay in the RRIF and simply elect to not take payments until 2009. If you need the income, you can certainly continue to receive payments but there is no regulatory obligation to do so.
2. Spousal RRSP contributions. Although the RRSP deadline to get a tax deduction for the 2007 tax year is February 29th, 2008, you may want to make spousal contributions before December 31st instead of the end of RRSP season. One of the catches with spousal RRSPs is there are attribution rules that prevent your spouse from withdrawing the money out of the spousal RRSP within the first three years otherwise it will be taxed back to the original contributor as income. Because of the specific wording, making the contributions in December instead of the during RRSP season in the new year can allow your spouse to withdraw the money out a full year sooner without being impacted by the attribution rules.
3. Create your Pension Income Credit. The pension income credit allows retirees to access the first $2000 of their pension income tax free. For those Canadians over the age of 65 without pension income, you can take advantage of the $2000 pension income tax credit by converting enough of the RRSP to a RRIF or annuity to generate at least $2000 per year of income even if you don’t need the money. You can create more than $2000 per year of income but the rest will be subject to tax at your marginal tax rate.
This year, the government also introduced Pension Income Splitting where someone who gets a company pension plan can give up to 50% of their pension income to their spouse. If they do not have a company pension, they can give up to 50% of the income from their RRIF or annuity to their spouse as long as the spouse is also over the age of 65. In this case, someone could create $4000 of yearly income instead of $2000 and give the extra $2000 of income to their spouse so the spouse can use their pension income credit. The spouse must be 65 in order to utilize the $2000 Pension Income Credit.
For those individuals who have company pensions, they can also give at least $2000 of pension income to their spouse so the spouse can also get $2000 of pension income tax-free through the pension income credit. In the case where you have a company pension as opposed to RRSPs, RRIFs or annuities, you and/or your spouse does not need to be 65 years.
Stay tuned for next week when I will share some more year end finance strategies.