If you, your spouse (which includes a common-law partner), or someone who lives with you is age 65 or older in 2023, here are some special tax tips that may apply to your situation:
Splitting eligible pension income
If you are age 65 by December 31, you can split up to 50 percent of your eligible pension income with your spouse or common-law partner. Eligible pension income includes payments from an employer’s pension plan or from a Registered Retirement Income Fund.
If your spouse’s tax rate is lower than yours, splitting your pension income may lower your combined tax payable. The split is done by making a joint election annually in your income tax returns.
If you do not have an employer pension, you can create eligible pension income by converting your Registered Retirement Savings Plan to a Registered Retirement Income Fund.
Claim The $2,000 Pension Income Tax Credit
You can reduce tax on the first $2,000 of pension income or a RRIF withdrawal by claiming the annual $2,000 pension tax credit on the first $2,000 of your income. So, if you will be age 65 or older by December 31 and won’t be receiving an employer pension, consider converting your RRSP to a RRIF by December 31 so you can claim the pension income tax credit for 2023.
And, if you split that RRIF income with your spouse (as discussed above), they can also claim a $2,000 pension income tax credit.
Transfer Unused Age Tax Credit Amount
If you will be 65 or older by December 31, you can claim a non-refundable Age Tax Credit. The maximum credit for 2023 is $8,396, reduced by 15 percent of your net income over $42,335 (therefore, this is eliminated if your 2023 net income is $98,309 or more).
If your spouse will be age 65 by December 31 and does not need all their Age Tax Credit to reduce their 2023 tax payable to nil, their unused amount can be transferred to you.
Old Age Security
Your OAS benefits can begin at age 65. However, if your net income exceeds the threshold amount ($86,912 for 2023), your benefits are reduced through a monthly recovery tax (referred to as the OAS clawback). To reduce clawback, look for ways to minimize your income. These can include splitting pension and CPP income with your spouse, deferring withdrawals from your RRSP and deferring receipt of your CPP benefits. In some cases, when OAS will be clawed back, it makes sense to defer applying for OAS benefits.
Canada Pension Plan Contributions If Self-Employed
If you are age 60 to 70 and self-employed, you must make both employer and employee contributions to CPP. The maximum 2023 CPP combined contribution for self-employed individuals is $7,508.90.
However, once you are age 65, you can elect in your income tax return to stop making all CPP contributions.
Split CPP/QPP Pension Benefits
Payments from Canada Pension Plan (CPP), Quebec Pension Plan (QPP) and Old Age Security (OAS) do not count as eligible pension income and therefore you cannot elect to split these on your personal tax return. However, you can apply to Service Canada to share your CPP/QPP benefits through a separate set of “sharing” rules.
If only one of you contributed to the CPP and/or the Quebec Pension Plan (QPP), you can share the one pension. If both of you contributed, you can receive an equal share of both pensions so that both spouses receive the same amount.
Home Accessibility Tax Credit
Improvements to your home to make it more accessible may be eligible for the federal Home Accessibility Tax Credit, a 15 percent non-refundable credit for up to $20,000 in home improvement expenses. These can include installing a stair lift, widening your doorways, adding wheelchair ramps, etc. The credit is available if you are age 65 or older or, if you are not age 65, you make improvements to support a family member who is age 65 or older and who lives with you.
If a qualifying expense also qualifies for the Medical Expense Tax Credit, both the Medical Expense and Home Accessibility Tax Credits can be claimed for the same expense.
Ontario Seniors Care at Home Tax Credit
In addition to the Ontario medical expense tax credit, seniors (or those who have a spouse or common-law partner) who turned 70 years of age or older in the year may claim this new refundable Ontario tax credit of 25% of their eligible medical expenses up to $6,000. This is reduced by 5% of family net income in excess of $35,000 and is fully phased out once family net income reaches $65,000.
Multi-Generational Home Renovation Tax Credit
Beginning January 1, 2023, up to $50,000 of expenses incurred to build a secondary suite for a family member age 65 or older, or an adult with a disability, is eligible for a 15 percent refundable tax credit.
Note that expenses will not qualify for this credit if they are otherwise claimed under the Medical Expenses or Home Accessibility Tax Credits.
Do you need help with your 2023 income tax planning? The experienced team of professionals at Ernst and Company CPA is available for personalized assistance. Please contact us today.
