Money Management Newsletter: Taxes
and Estate Matters
How to make a GIC qualify for the Pension Income
If you are 65 years old
or older there is a relatively easy way to make a GIC
qualify for the Pension Income Tax Credit. As you are probably aware this
credit is one of the "non refundable tax credits" that are available
on that portion of your tax return where you deduct your basic personal
exemption and your age credit.
This particular credit is normally
only eligible for those with private pension, annuity
income. However, the interest income from a GIC purchased from a life
insurance company will qualify for this credit if you are 65 or older.
Why?.. because the life insurance GIC is really considered a deferred
annuity under the insurance act, even though it is essentially the
same GIC product you would purchase from a bank or trust company.
What is the credit worth in actual
Well since the maximum deduction under this credit
is $1,000, only $1,000 of GIC interest income is eligible. For the 1996
tax year, using the most recent provincial tax changes, the full $1,000
credit would save you about $267 in tax (slightly more if the surtax savings
are included). For 1997 the value of the credit will drop to about $253
due to the reduction in the provincial tax rate to 49% of federal tax.
What can you do now for 1996?
If you want some interest income to be eligible for
the 1996 tax year, you will need to purchase a monthly payment GIC or
possibly a semi-annual payment product if you have funds available in
June. Life insurance company GIC rates are generally comparable to those
of the major banks and trusts with terms available from one year to in
some cases 25 years or more. But don't dwell on minor rate differences,
the tax benefit far exceeds any rate disadvantage.. Your principal and
interest are insured by the insurance industry for up to $60,000 for all
To determine how much principal you would require to
be able to claim the full credit, divide $1,000
by the applicable interest rate for the term you want. For example if
you wanted a 5 year term and the current annual rate was 6.5% you would
need to invest $15,385 (1000 divided by 6.5 x 100=15,385).
To claim the full credit for periods shorter than one
year repeat the above procedure using the applicable monthly or semi-annual
rate then multiply this figure by 12 and divide by the appropriate number
of months. For example, if you have funds available in July, there are
5 monthly payments until December. If the 5 year monthly rate was 6.25%
your calculation would be as follows:
- 1000 divided by 6.25 x 100=16,000
16000 x 12 divided by 5=38,400
You would therefore need to invest
$38,400 to receive $1,000 in interest over the 5 month period.
* * *
||Use this link to load a printer-friendly
version of this document.
Questions about the
above send e-mail to:
, Fiscal Agents Money Management Newsletter
25 Lakeshore Road, Oakville, On L6K 1C6.