Retirement coming, favoring a late pension and deferring the maximum tax are advice repeated many times like a mantra in financial planning. However, with the latest enhancement to the refundable tax credit for senior assistance, we will have to review all of this and redo the calculations.
Barring exceptions, the financial advantage of postponing taking a pension to age 65, or even beyond, emerged clearly in the public consultations on the Québec Pension Plan. Gold, “ deferring taxation is no longer true. Postponing the payment of pensions, PSV and the disbursement of RRSPs is no longer true. The invitation to review the calculations comes from Félix Caron, financial security advisor at Gestion Roger Dubois, during an interview at Duty.
The mutual fund representative registered with Investia financial services points in the direction of the refundable tax credit for the support of seniors. Quebec has once again improved it in 2022, in response to “the persistent rise in the level of consumer prices, thus weakening the financial situation of many seniors”. Introduced in 2018 to provide financial assistance to eligible individuals aged 70 or over with modest incomes, the maximum credit was $200 for a single person and $400 for an eligible senior couple. In fall 2021, it increased to $400 and $800 respectively. For the 2022 tax year, it is $2,000 and $4,000 respectively. Quite a leap!
The calculation of the tax credit takes into account a mechanism that reduces tax assistance by 5% for each dollar of family income that exceeds the applicable threshold. In its documentation, Quebec specifies that the family income used to calculate the refundable tax credit reduction depends on the individual’s marital status. So :
An eligible senior living alone will be able to benefit from a refundable tax credit of up to $2,000 provided that his family income, for the 2022 taxation year, does not reach $64,195, the reduction rate 5% applying from a family income of $24,195;
an eligible senior and their spouse qualifying as an eligible senior will benefit from a refundable tax credit of up to $4,000 when their family income, for the 2022 tax year, does not reach $119,350 $, the reduction rate of 5% that applies from a family income of $39,350;
an eligible senior and their eligible spouse who do not qualify as an eligible senior will be able to benefit from a refundable tax credit of up to $2,000 when their family income, for the 2022 taxation year, does not will not reach $79,350, the reduction rate of 5% applying from a family income of $39,350.
Given the significant improvement in the tax credit, the maximum amount will no longer be subject to annual indexation as of tax year 2022. In addition, for years after 2022, a mechanism for revaluing the applicable reduction rate of 5% will be introduced.
Marginal Effective Tax Rate
“It is the socio-fiscal dimension that matters. From the age of 70, it increases the marginal effective tax rate [TEMI] of all. The impact is significant,” says Félix Caron. “The credit goes from $400 to $2,000. It changes everything! The more taxable income you increase, the less you qualify for this credit. »
“The METR has just increased by five percentage points. It is enormous ! In the accumulation phase, an average tax return can hover around 37%. With the enhancement of the refundable tax credit, you pay at least an METR of 42%. “Taxable income after age 70 becomes penalizing. You have to disburse at the bottom of the TEMI, ”he insists.
The RRSP can thus become penalizing for taxpayers. At least, the enhancement of the tax credit is intended to be a disincentive to a late pension. Rather, it promotes early withdrawal in tax, financial and estate terms. For many “You will have to take the pension from age 60 and pay out your RRSP from age 60-65,” concludes Félix Caron.
What is a METR?
The marginal effective tax rate (METR) is the measure of the rate of tax burden on additional income. Indeed, if work income increases, it is possible that federal and Quebec income taxes will be higher, that contributions to the public drug insurance plan or additional social security contributions (QPP, QPIP, EI) will be to pay or that tax benefits decrease (fewer credits for consumption taxes or child benefits, for example), explains the Research Chair in Taxation and Public Finance at the University of Sherbrooke.
The METR takes all of these elements into account. For example, an METR of 55% would indicate that 55% of the additional work income does not stay in the household’s pockets due to increases in taxes, contributions or loss of benefits.