In our working years, determining our personal tax burden can be quite simple--earn income and pay personal tax at the graduated rates. In our senior years, the formula is less straightforward. Though seniors pay tax at the same graduated personal tax rates as the rest of the population, senior-specific benefits, programs, and credits may be negatively impacted by their income. Programs vary, from nursing home and health care premium subsidies to Old Age Security payments. Further complicating matters, the type of earnings, such as employment income versus eligible dividends versus ineligible dividends have different impacts.
There are numerous other provincial/territorial credits and programs available to seniors which are often paid only if applied for, and commonly rely on personal income tax return filings to support eligibility. Many income-tested programs are available only to the lowest-income seniors, making an understanding of the impact of various types of income critical. Below we will discuss the types of income a senior may receive and planning considerations for managing the income. Also, we will consider tax credits and other programs commonly available to seniors.
Old Age Security (OAS) and Guaranteed Income Supplement (GIS)
OAS and GIS are monthly payments available to most Canadians aged 65 and greater. The age of eligibility will gradually increase to 67, commencing in April 2023, delaying access for those born after 1957. To qualify for the full pension, an individual must have 40 years of Canadian residency after age 18.
OAS and GIS payments vary depending on the recipient's "net income" for tax purposes. The maximum GIS amount for the third quarter of 2015 for a single, divorced or widowed pensioner is $765.93. These amounts are eroded as the recipients earn income. GIS payments are eliminated quite early; for 2015, at approximately $17,000 for single persons and $22,000 for married couples. Generally, each additional dollar of income on this year's tax return reduces next year's GIS benefits by $0.50--equivalent to an additional 50% tax on these earnings.
OAS payments are eroded at a higher level; in 2015, at $72,809 and fully eliminated at $117,954. Every extra dollar earned reduces the OAS benefit by $0.15, effectively a 15% tax.
Seniors whose OAS would be fully clawed back may consider deferring the commencement of payments until age 70. This provides the benefit of higher future payments (0.6% per month of...