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The Money Management Newsletter: Taxes and Estate Matters
How to make a GIC qualify for the Pension Income tax credit

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 or RRIF 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 savings?

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 terms.

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.

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