The truth about the pension splitting proposal by knowledgegod


									The truth about the pension splitting
David Christianson, CFP, R.F.P., TEP
“Dollars and Sense”

The federal government has announced that taxpayers who are married or in a
common-law relationship will be able to split any eligible pension income with a spouse,
thus lowering the family tax bill. I applaud and support this proposal, as far as it goes.

However, the idea has forced us to look at some discrimination in the definition of
eligible pension income, both for this income splitting idea and for the current pension
income credit.

First of all, I acknowledge that income splitting does nothing for single people.

Splitting income equally between spouses usually reduces the family tax bill, as less tax
is paid at higher tax rates and more at a lower rate. This proposal is limited to “eligible
pension income”. Does that treat all “retired” people equally?

Eligible pension income includes any periodic payments received from an employer-
sponsored registered pension plan. So, if you retire at age 58 and start receiving a
pension, this income is eligible both for the pension credit on the first $2,000 of pension,
and for the new pension income splitting calculation.

However, if you retire at 58 and transfer the commuted value of your pension to a
Locked-in Retirement Account (LIRA) or Life Income Fund (LIF), and receive regular
monthly payments from that plan, the income will NOT qualify for either the credit or the
splitting, until you reach age 65.

Anyone in the second situation would suggest this is discriminatory. The only people
under 65 who can claim LIF or RRIF income are those who received the account as the
result of the death of a spouse.

If you feel that this is discriminatory, then now is the time to write to your MP and the
Minister of Finance. Both can be reached at House of Commons, Ottawa, ON, K1A
0A6, or by obtaining their e-mail addresses on the House of Commons website

Let’s look at the potential benefit. Several readers have expressed scepticism and
provided me with income scenarios to review. Scenario one:

              Bob         Sally
  Pension     $34,000     $0
   CPP        $8,000      $1,440
   OAS        $5,900      $5,900
   Total      $47,900     $7,340
Charitable donations $1,200
Medical expenses $1,300

Current family taxes $8,595.
Family taxes with pension splitting $5,858.
Tax saving $2,737.

Scenario Two:

            Madge       Ralph
Pension     $77,000     $12,000
 CPP        $9,000      $5,000
 OAS        $5,846      $5,846
 Total      $91,846     $22,846

Note – Madge’s OAS is before clawback
Charitable donations $1,200
Medical expenses $1,300

Current family taxes $32,375.
Family taxes with pension splitting $28,184.
Tax saving $4,191.

In scenario one, splitting the income actually restores the medical credit, which had been
lost entirely prior to splitting.

In scenario two, when splitting the income, the taxpayers lose the medical credit and a
significant portion of the age credits that Ralph had been receiving, but this is more than
made up for with lower taxes payable and the elimination of the OAS clawback on

These are just examples. The real question for you is how can you maximize your
personal benefit from this proposal?

If you are planning your retirement, part of your preparation should, of course, be tax
projections for your post-retirement situation. Those projections should be done with
and without income splitting, to see what benefit might be available for you. That would
be one more ingredient in helping you decide whether to take a monthly pension or
consider transferring your commuted value to a self-directed, LIRA.

It could also help you decide whether or not to actively lobby the government to address
the apparent inequities revealed above (but should have no influence on whether or not
to stay married).

David Christianson is a fee-only financial planner and investment counsel with
Wellington West Total Wealth Management Inc. His column appears Fridays. You can
e-mail him at

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