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Pension Income Splitting Opportunities Require Careful Planning Now

Taxpayers in receipt of qualifying pension income in 2007 will be able to split up to 50% of that income with their spouse or common law partner. There is no age restriction for the partner who will be reporting the split pension income and some interesting potential new outcomes and pitfalls in developing tax efficient strategies arise in maximizing the opportunity for each household.

The following are some facts for you to consider in planning to use this new transfer which should be covered off when pre-retirees come in for tax preparation assistance in the next few months. In cases where pension benefits are currently being drawn by one or both spouses, a phone call to evaluate pension splitting opportunities now before the busy tax season gets under way will be appreciated by clients.

• Qualifying pension income recipients must be resident in Canada and allocate split income to spouses (or common-law partners) resident in Canada.
• Amounts allocated to be split will be deducted from the income of the recipient and added to the income of the spouse to whom the amount is allocated.
• Both persons must agree to the allocation.
• The allocated amount will be treated as the spouse’s income for all purposes of the Act. Splitting may therefore not only reduce current taxes but may increase access to the OAS and means-tested refundable and non-refundable credits.
• Pension income allocated will qualify for the pension income amount on the return of the recipient of the allocation.
• Eligible pension income includes the following:

  A. For individuals aged 65 years and over:
  

  • Pension benefits from a registered pension plan (RPP),
  • Annuity income from a registered retirement savings plan (RRSP),
  • Payments under a registered retirement income fund (RRIF).

  B. For individuals under 65 years of age income from pension benefits from a registered pension plan or any of the other amounts described above received as the result of the death of a spouse.

Ineligible amounts: Benefits from public pension plans like the OAS and CPP, certain RCAs (Retirement Compensation Arrangements).

Planning Checklist for Pension Income Splitting

A variety of provisions are affected on the personal tax return as a result of the opportunity to split up to 50% of eligible pension income with the spouse. Consider this checklist in planning for tax efficiency:

• CPP Assignment: Is it still advisable the CPP benefits are split between spouses?
• Income Allocation: A rethinking of who should draw income from RRSPs and RRIFs first and in what amount is required. The same is true of income allocation for interest and dividend sources.
• Realization of Taxable Gains: With income split off to the spouse, does it make sense to tap into some taxable gains this year? How does that affect tax loss utilization? Intergenerational transfer of cottage properties?
• Small Business Owners: Should family and owner/manager compensation structures be altered? Should net income levels for the purposes of CPP contribution stay the same?
• Interspousal Loans: Should more or less capital be transferred from the higher earner to the lower by drawing up interspousal loans for investment purposes?
• Instalment Payments: These could decrease for the higher earner, possibly put the lower earner into the quarterly instalment profile. Review this before the first instalment for 2007 (March 15) is required. It’s possible there will be more cash flow and a smaller tax liability this year. If so, base instalments on an estimation of current year taxable income.
• OAS Clawbacks for each taxpayer may be reduced in cases where individual net income levels fall between $63,511 and approximately $102,865 in 2007.
• Age Amounts: The 2007 Age Amount is $5,177, which is reduced when individual net income exceeds $30,936.
• Spousal Amount: The 2007 Spousal Amount is $7,581 which is reduced when net income exceeds $759.
• Transfers from Spouse on Schedule 2: Claims to the higher earner could decrease.
• Medical Expenses: Claims could increase if the lower income earner becomes taxable as a result of the transfer of the eligible pension income.
• Charitable Donations: Who should make the claim now to maximize benefits? Remember, a better tax result occurs when charitable donations claimed exceed $200. Spouses can claim each other’s gifts, providing receipts are available.
• Political Contributions: Again, spouses can act as agents of one another for these purposes when making claims. Where is the best benefit after pension income is split?

This information is used with the permission of Knowledge Bureau, Inc. For more information go to www.knowledgebureau.com.