Brown Bag Lunch SeriesBrown Bag Lunch SeriesTopic: Pension Income SplittingTopic: Pension Income Splitting

January 29, 2008January 29, 2008

Hyatt Lassaline LLPHyatt Lassaline LLP

Stephen Greff B.Comm, CAStephen Greff B.Comm, CA

2510 Ouellette Avenue, Suite 203, Windsor, Ontario, N8X 1L4

Phone: (519) 966-4626

www.hl.on.ca

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What is pension income splitting?What is pension income splitting?

• Beginning with 2007 income tax returns, Beginning with 2007 income tax returns, Canadian residents will generally be able Canadian residents will generally be able to allocate up to one-half of their income to allocate up to one-half of their income that qualifies for the existing pension that qualifies for the existing pension income tax credit to their resident spouse income tax credit to their resident spouse for income tax purposes.for income tax purposes.

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• The amount allocated is deducted in The amount allocated is deducted in determining the net income of the person determining the net income of the person who actually received the pension income, who actually received the pension income, and it is included in computing the net and it is included in computing the net income of the spouse or common-law income of the spouse or common-law partner. Pension splitting affects the partner. Pension splitting affects the calculation of income and tax payable for calculation of income and tax payable for both persons, so they must both agree to both persons, so they must both agree to the allocation in their tax returns for the the allocation in their tax returns for the year in question.year in question.

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Is it necessary to contact the payer Is it necessary to contact the payer of the pension?of the pension?

• Splitting eligible pension income does not Splitting eligible pension income does not have any effect on how or to whom the have any effect on how or to whom the pension income is paid, so it does not pension income is paid, so it does not involve the payer of the pension. involve the payer of the pension. Information slips will be prepared and sent Information slips will be prepared and sent to the recipient of the pension income in to the recipient of the pension income in the same manner as previous years.the same manner as previous years.

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Who qualifies for pension income Who qualifies for pension income splitting?splitting?

• A pension recipient (pensioner) and his or A pension recipient (pensioner) and his or her spouse or common-law partner can her spouse or common-law partner can elect to split the pensioner’s “eligible elect to split the pensioner’s “eligible pension income” received in the year if:pension income” received in the year if:

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• They are married with each other in the They are married with each other in the year and are not because of a break down year and are not because of a break down in their marriage living separate and apart in their marriage living separate and apart from each other at the end of the year and from each other at the end of the year and for a period of 90 days commencing in the for a period of 90 days commencing in the year; andyear; and

• They are both resident in Canada on They are both resident in Canada on December 31; orDecember 31; or– If deceased in the year, resident in Canada on If deceased in the year, resident in Canada on

the date of death; orthe date of death; or– If bankrupt in the year, resident in Canada on If bankrupt in the year, resident in Canada on

December 31 of the calendar year.December 31 of the calendar year.

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What is “eligible pension income”?What is “eligible pension income”?

• Eligible pension income is generally the Eligible pension income is generally the total of the following amounts received by total of the following amounts received by the pensioner in the year (these amounts the pensioner in the year (these amounts also qualify for the pension income also qualify for the pension income amount):amount):

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• The taxable part of annuity payments from The taxable part of annuity payments from a superannuation or pension fund or plan; a superannuation or pension fund or plan; andand

• If received as a result of the death of a If received as a result of the death of a spouse or common-law partner, or if the spouse or common-law partner, or if the pensioner is age 65 or older at the end of pensioner is age 65 or older at the end of the year:the year:– Annuity and registered retirement income Annuity and registered retirement income

fund payments (including life income fund); fund payments (including life income fund); – Registered Retirements Savings Plan annuity Registered Retirements Savings Plan annuity

payments.payments.

Note: OAS and CPP do not qualifyNote: OAS and CPP do not qualify

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• Regardless of an individual’s age, eligible Regardless of an individual’s age, eligible pension income will not include:pension income will not include:– OAS benefitsOAS benefits– Guaranteed Income Supplements (GIS) Guaranteed Income Supplements (GIS)

benefitsbenefits– An RRSP or DPSP annuity or RRIF payment An RRSP or DPSP annuity or RRIF payment

to a recipient who is under 65 (unless to a recipient who is under 65 (unless received as result of spouses death);received as result of spouses death);

– RRSP withdrawals;RRSP withdrawals;– Payments from a retirement compensation Payments from a retirement compensation

arrangement; orarrangement; or– CPP/QPP benefitsCPP/QPP benefits

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How do individuals elect to split How do individuals elect to split eligible pension income?eligible pension income?

• The pensioner and spouse or common-law The pensioner and spouse or common-law partner have to make a joint election in partner have to make a joint election in prescribed form with their income tax prescribed form with their income tax returns for the year on or before their filing returns for the year on or before their filing due date.due date.

• The new Form T1032 is now currently The new Form T1032 is now currently availableavailable

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Who will claim the tax withheld at Who will claim the tax withheld at source from the eligible pension source from the eligible pension

income?income?• The income tax that is withheld at source The income tax that is withheld at source

from the eligible pension income will have from the eligible pension income will have to be allocated from the pensioner to the to be allocated from the pensioner to the spouse or common-law partner in the spouse or common-law partner in the same proportion as the pension income is same proportion as the pension income is allocated.allocated.

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Will pension income splitting affect Will pension income splitting affect the pension income amount?the pension income amount?

• The pensioner will be able to claim whichever The pensioner will be able to claim whichever amount is less: $2,000 or the amount of his or amount is less: $2,000 or the amount of his or her eligible pension income after excluding her eligible pension income after excluding amounts allocated to his or her spouse or amounts allocated to his or her spouse or common-law partner.common-law partner.

• The spouse or common-law partner will be able The spouse or common-law partner will be able to claim whichever amount is less: $2,000 or the to claim whichever amount is less: $2,000 or the amount of his or her pension income that is amount of his or her pension income that is eligible for the pension income amount, eligible for the pension income amount, including allocated pension income.including allocated pension income.

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• Note: A pension that qualifies for the Note: A pension that qualifies for the pension income amount in the hands of pension income amount in the hands of the pensioner does not necessarily qualify the pensioner does not necessarily qualify for the pension income amount in the for the pension income amount in the spouse or common-law partner’s hands spouse or common-law partner’s hands because eligibility can depend on age.because eligibility can depend on age.

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Does pension splitting affect the Does pension splitting affect the GST credit, CCTB and other GST credit, CCTB and other

benefits and tax credits?benefits and tax credits?• Allocating pension income to a spouse Allocating pension income to a spouse

reduces the pensioner’s net income and reduces the pensioner’s net income and increases the spouse’s net income. As a increases the spouse’s net income. As a result, benefits and tax credits that are result, benefits and tax credits that are calculated based on the total of the net calculated based on the total of the net incomes of both spouses such as GST, incomes of both spouses such as GST, CCTB – will not change as a result of CCTB – will not change as a result of pension splitting.pension splitting.

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• However, pension splitting will affect any However, pension splitting will affect any tax credits and benefits that are calculated tax credits and benefits that are calculated using one individual’s net income, such as using one individual’s net income, such as the age amount, the spouse or common-the age amount, the spouse or common-law partner amount, and the repayment of law partner amount, and the repayment of Old Age Security benefits.Old Age Security benefits.

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If pensioners intend to split pension If pensioners intend to split pension income when filing their returns, income when filing their returns,

can they ask for a reduction of tax can they ask for a reduction of tax being withheld from the eligible being withheld from the eligible

pension income during the year?pension income during the year?

• The CRA cannot approve a reduction of The CRA cannot approve a reduction of tax withheld at source based on an tax withheld at source based on an election to split pension income.election to split pension income.

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Example 1Example 1• Rosco and Virginia Rosco and Virginia are 62 and retired. Rosco are 62 and retired. Rosco

has no income; Virginia has a $50,000-a-year has no income; Virginia has a $50,000-a-year pension. She can split her income 50-50 with pension. She can split her income 50-50 with Rosco even though she’s under 65, because it’s Rosco even though she’s under 65, because it’s pension income.pension income.

• Combined after tax-income before splitting : Combined after tax-income before splitting : $39,400$39,400

• Combined after tax-income after splitting : Combined after tax-income after splitting : $43,100$43,100

• Income boost: $3,300 a yearIncome boost: $3,300 a year

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Example 2Example 2

• Tom and NicoleTom and Nicole are 64. Tom has a are 64. Tom has a $70,000 pension and Nicole has no $70,000 pension and Nicole has no income. Otherwise, they’re in the same income. Otherwise, they’re in the same position as Rosco and Virginia.position as Rosco and Virginia.

• Combined after-tax income before Combined after-tax income before splitting: $53,400splitting: $53,400

• Combined after-tax income after splitting: Combined after-tax income after splitting: $58,800$58,800

• Income boost: $5,400 a yearIncome boost: $5,400 a year

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Example 3Example 3• Bob and MargaretBob and Margaret are 67 and have are 67 and have

applied for OAS. Bob receives $60,000 a applied for OAS. Bob receives $60,000 a year from his RRIF, $30,000 from year from his RRIF, $30,000 from consulting work, and $10,000 from CPP. consulting work, and $10,000 from CPP. Because his income is high, all of Bob’s Because his income is high, all of Bob’s OAS is clawed back. By splitting his RRIF OAS is clawed back. By splitting his RRIF income with Margaret, Bob pays less tax income with Margaret, Bob pays less tax and gets most of his OAS back.and gets most of his OAS back.

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Bob and Margaret cont’dBob and Margaret cont’d

• Combined after-tax income before Combined after-tax income before splitting: $76,500splitting: $76,500

• Combined after-tax income after splitting: Combined after-tax income after splitting: $85,900$85,900

• Income boost: $9,400 a yearIncome boost: $9,400 a year

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Can you afford to retire?Can you afford to retire?

• Review the following scenario calculating Review the following scenario calculating the net cash flow while working to the net the net cash flow while working to the net cash flow in the year following retirement.cash flow in the year following retirement.

• Spouse 1 retires, spouse 2 continues p/tSpouse 1 retires, spouse 2 continues p/t

• Pension & CPP are split to minimize i/t.Pension & CPP are split to minimize i/t.

• Spouses split $12,000 in partnership Spouses split $12,000 in partnership income from a post-retirement business.income from a post-retirement business.

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Can you afford to retire?Can you afford to retire?(2006 Cash Flow)(2006 Cash Flow)

IncomeIncome S1S1 S2S2 TotalTotal

GrossGross 87,23687,236 12,43712,437 99,67399,673

RRSPRRSP (5,416)(5,416) -- (5,416)(5,416)

Union DuesUnion Dues (564)(564) (45)(45) (609)(609)

DonationsDonations (8,056)(8,056) -- (8,056)(8,056)

CPPCPP (1,911)(1,911) (553)(553) (2,464)(2,464)

EIEI (727)(727) (56)(56) (785)(785)

TaxTax (15,492)(15,492) (141)(141) (15,633)(15,633)

Net CashNet Cash 55,06855,068 11,64211,642 66,71066,710

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Can you afford to retire?Can you afford to retire?(2008 Cash Flow)(2008 Cash Flow)

IncomeIncome S1S1 S2S2 TotalTotal

GrossGross 39,36939,369 43,32643,326 82,69582,695

RRSPRRSP 00 00 00

Union DuesUnion Dues 00 (45)(45) (45)(45)

DonationsDonations (8,056)(8,056) 00 (8,056)(8,056)

CPPCPP 00 00 00

EIEI 00 (56)(56) (56)(56)

TaxTax (3,072)(3,072) (7,363)(7,363) (10,435)(10,435)

Net CashNet Cash 28,24128,241 35,86235,862 64,10364,103

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Can You Afford to Retire?Can You Afford to Retire?(what happened?)(what happened?)

• The reduction of Gross Combined Income The reduction of Gross Combined Income of $16,978 is offset by a reduction in of $16,978 is offset by a reduction in RPP/RRSP, union dues, CPP, EI and RPP/RRSP, union dues, CPP, EI and income tax totalling $14,371, leaving a net income tax totalling $14,371, leaving a net cash shortfall of only $2,607.cash shortfall of only $2,607.

• Questions:Questions:– Can S1 afford to work(gas, clothing, tranport)Can S1 afford to work(gas, clothing, tranport)– Can S2 stand having S1 around 24/7?Can S2 stand having S1 around 24/7?

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Buyouts…Buyouts…

• Can timing of buyout be deferred?Can timing of buyout be deferred?– Portions such as retiring allowancePortions such as retiring allowance– Unused vacation time/sick day pay outUnused vacation time/sick day pay out

• How much can be sheltered into an How much can be sheltered into an RRSP?RRSP?– Through direct transfer (subject to limits)Through direct transfer (subject to limits)– Available RRSP contribution roomAvailable RRSP contribution room

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The end of the spousal RRSP?The end of the spousal RRSP?

• Consider the following opportunity:Consider the following opportunity:– Stop contributing to spousal RRSP for 3 yearsStop contributing to spousal RRSP for 3 years– Draw money out of spousal RRSP (at a lower Draw money out of spousal RRSP (at a lower

tax rate)tax rate)– Re-invest money into personal RRSP at Re-invest money into personal RRSP at

higher tax ratehigher tax rate

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Warning….Warning….

– This strategy is using up RRSP contribution This strategy is using up RRSP contribution room in order to create a tax savings at a room in order to create a tax savings at a differential tax rate, but foregoing the unused differential tax rate, but foregoing the unused contribution room at potentially higher tax contribution room at potentially higher tax rates in the future.rates in the future.• Such as in a buyout situation.Such as in a buyout situation.

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Questions?........Questions?........

• Please see Hyatt Lassaline for any of the Please see Hyatt Lassaline for any of the above calculations or for any other tax or above calculations or for any other tax or estate planning needs.estate planning needs.