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PROPOSSED CHANGES TO OLD AGE SECURITY

When it takes effect in 2001, Ottawa's new Seniors Benefit is supposed to replace and simplify the Old Age Security Pension (OAS), the Guaranteed Income Supplement (GIS), as well as the current age and pension tax credits for seniors.
Old Age Security (OAS) is a monthly pension that all Canadians are entitled to. Benefits are taxed, and they disappear for single seniors with incomes higher than $85,000, and for couples who earn more than $170,000. The GIS is a supplementary benefit for low-income OAS recipients. It is not taxed, but it declines with other earnings.
The new Seniors Benefit will be one annual inflation-inexed payment of $11,420 for single seniors and $18,440 for a couple. Although it's tax-free the benefit will be reduced by other income.
Recipients will lose 50 cents of benefit for each $1 of individual earnings up to $12,000. The benefit then stays at $5,160 for singles and $10,320 for couples until income hits $25,921.
At that level, recipients start losing 20 cents of benefit for each additional $1 in income. Marginal tax rates for this income level are around 40 per cent to start, so this extra 20 per cent reduction means that many middle-income earners will face an effective marginal tax rate of 60 per cent.
The Seniors Benefit will disappear for singles who earn more than $52,000 a year and couples who earn more than $78,000. The double tax hit creates some strange incentives. As a result, two rules of thumb for RRSPs -put in as much money as possible and leave it there as long as possible-may not apply in some cases.
Many people now aged 55 to 60 who are in low and middle tax brackets should consider halting RRSP contributions and investing outside their plans.
Investors in the 42 per cent marginal tax bracket would have to wait five years or more for their RRSP contributions to grow enough to offset the double taxation hit they'd incur in taking that money out after age 65.
You must pass one of five tests in order to benefit from an RRSP contribution:

On December 31,1995,either you or your spouse was age 60 or older, so the Seniors Benefit need not apply.

You are paying tax before retirement at a marginal rate in excess of 50 per cent.

A couple's retirement income is high enough (over $78,000) to eliminate both Seniors Benefits.

You withdraw the funds from the RRSP before attaining age 65.

You leave the funds compounding tax-free in the RRSP long enough to compensate for the higher effective tax rate on withdrawal.

It may also make sense for some couples to tap into RRSP savings before unsheltered savings, the opposite of what experts usually recommend under current rules. If at least one spouse is younger than 65, with a marginal tax rate below 50 per cent, it may be more effective to tap into the RRSP until age 65 and then live on non-RRSP money.
Investors will have to do some careful planning to avoid losing between a fifth and half of their savings. They should also remember that many factors affect decisions about RRSP contributions and withdrawals, and it may worth consulting your financial advisor or a tax professional.

	When it takes effect in 2001, Ottawa's new Seniors Benefit is supposed to replace and simplify the Old Age Security Pension (OAS), the Guaranteed Income Supplement (GIS), as well as the current age and pension tax credits for seniors. Old Age Security (OAS) is a monthly pension that all Canadians are entitled to. Benefits are taxed, and they disappear for single seniors with incomes higher than $85,000, and for couples who earn more than $170,000. The GIS is a supplementary benefit for low-income OAS recipients. It is not taxed, but it declines with other earnings. The new Seniors Benefit will be one annual inflation-inexed payment of $11,420 for single seniors and $18,440 for a couple. Although it's tax-free the benefit will be reduced by other income. Recipients will lose 50 cents of benefit for each $1 of individual earnings up to $12,000. The benefit then stays at $5,160 for singles and $10,320 for couples until income hits $25,921. At that level, recipients start losing 20 cents of benefit for each additional $1 in income. Marginal tax rates for this income level are around 40 per cent to start, so this extra 20 per cent reduction means that many middle-income earners will face an effective marginal tax rate of 60 per cent. The Seniors Benefit will disappear for singles who earn more than $52,000 a year and couples who earn more than $78,000. The double tax hit creates some strange incentives. As a result, two rules of thumb for RRSPs -put in as much money as possible and leave it there as long as possible-may not apply in some cases. Many people now aged 55 to 60 who are in low and middle tax brackets should consider halting RRSP contributions and investing outside their plans. Investors in the 42 per cent marginal tax bracket would have to wait five years or more for their RRSP contributions to grow enough to offset the double taxation hit they'd incur in taking that money out after age 65. You must pass one of five tests in order to benefit from an RRSP contribution: On December 31,1995,either you or your spouse was age 60 or older, so the Seniors Benefit need not apply. You are paying tax before retirement at a marginal rate in excess of 50 per cent. A couple's retirement income is high enough (over $78,000) to eliminate both Seniors Benefits. You withdraw the funds from the RRSP before attaining age 65. You leave the funds compounding tax-free in the RRSP long enough to compensate for the higher effective tax rate on withdrawal. It may also make sense for some couples to tap into RRSP savings before unsheltered savings, the opposite of what experts usually recommend under current rules. If at least one spouse is younger than 65, with a marginal tax rate below 50 per cent, it may be more effective to tap into the RRSP until age 65 and then live on non-RRSP money. Investors will have to do some careful planning to avoid losing between a fifth and half of their savings. They should also remember that many factors affect decisions about RRSP contributions and withdrawals, and it may worth consulting your financial advisor or a tax professional.

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