New tax legislation applying to all Canadians has taken effect as of January 1, 2013. The legislation is broad reaching. What follows below are the most significant changes facing Canadians.
The age for early retirement under the Canadian Pension Plan (CPP) remains unchanged at age sixty. However, the payout from the pension will be lower if you file for benefits after January 1 than if you did so on December 31, 2012. Also, in mid-2013, seniors reaching age 65 may now defer collecting Old Age Security (OAS) pension benefits until age 70 if they choose. The objective of these changes is to encourage elderly workers to remain in the work force longer in exchange for a higher benefit payout later in life. Workers who defer collecting their benefits will receive higher payouts when they do collect. Here’s how maximum CPP benefit payouts are set for 2013 based on attained age when benefits are received:
- CPP Maximum Monthly Benefits by Age
- Age 60 (early retirement): $684.45
- Age 65 (average age retirement): $1,012.50
- Age 70 (oldest allowable retirement age): $1,437.75
As you can see, deferring retirement by five years from age 65 to age 70 is tantamount to purchasing a lifetime annuity for $425.25. From a purely financial viewpoint, deferring retirement for five years is a good deal as a lifetime annuity with a monthly payout of $425 would cost on average $70,000 if purchased at age 65.
The tax reforms also increased the Employment Insurance (EI) premiums most Canadians will pay. The EI premium increased by $49.50 and will be followed by another $51.15 increase a year later. Also, workers will be tiered based on the probability they have to make use of EI benefits. The three tiers are frequent claimants, occasional claimants or long-tenured workers (those who rarely take EI benefits). The government wants to see if the EI program can be modified so as to encourage citizens to migrate to regions where work is more consistent.
The four basic tax rates and threshold for benefits is now indexed for inflation at 2% annually. The rates are now as follows:
- Canadian Tax Rates
- Income after $11,038 – $43,560: 15% tax bracket
- $43,561 – $87,122: 22% tax bracket
- $87,123 – $132,405: %26 tax bracket
- $132,406 and above: $29 tax bracket
In addition, the tax changes will allow workers to save more of their income towards their tax free accounts. The maximum annual savings has increased from $5,000 to $5,500. The federal tax credit for senior citizens is now $6,954 with a net income-based phase out starting at $34,562 and ending at $80,258.
The new Canadian tax laws that took effect at the start of 2013 are broad and far reaching indeed. However, as can be seen from the descriptions above, the measures are largely even-handed with both incentives and counter-incentives in place. The entitlement reforms regarding the CPP are an achievement that other nations should take note of.