Brown Bag Lunch Series Topic: Pension Income Splitting January 29, 2008 Hyatt Lassaline LLP Stephen Greff B.Comm, CA 2510 Ouellette Avenue, Suite 203, Windsor, Ontario, N8X 1L4 Phone: (519)

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

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

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

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

7 They are married with each other in the year and are not because of a break down in their marriage living separate and apart from each other at the end of the year and for a period of 90 days commencing in the year; andThey are married with each other in the year and are not because of a break down in their marriage living separate and apart from each other at the end of the year and for a period of 90 days commencing in the year; and They are both resident in Canada on December 31; orThey are both resident in Canada on December 31; or –If deceased in the year, resident in Canada on the date of death; or –If bankrupt in the year, resident in Canada on December 31 of the calendar year.

8 What is “eligible pension income”? Eligible pension income is generally the total of the following amounts received by the pensioner in the year (these amounts also qualify for the pension income amount):Eligible pension income is generally the total of the following amounts received by the pensioner in the year (these amounts also qualify for the pension income amount):

9 The taxable part of annuity payments from a superannuation or pension fund or plan; andThe taxable part of annuity payments from a superannuation or pension fund or plan; and If received as a result of the death of a spouse or common-law partner, or if the pensioner is age 65 or older at the end of the year:If received as a result of the death of a spouse or common-law partner, or if the pensioner is age 65 or older at the end of the year: –Annuity and registered retirement income fund payments (including life income fund); –Registered Retirements Savings Plan annuity payments. Note: OAS and CPP do not qualify

10 Regardless of an individual’s age, eligible pension income will not include:Regardless of an individual’s age, eligible pension income will not include: –OAS benefits –Guaranteed Income Supplements (GIS) benefits –An RRSP or DPSP annuity or RRIF payment to a recipient who is under 65 (unless received as result of spouses death); –RRSP withdrawals; –Payments from a retirement compensation arrangement; or –CPP/QPP benefits

11 How do individuals elect to split eligible pension income? The pensioner and spouse or common-law partner have to make a joint election in prescribed form with their income tax returns for the year on or before their filing due date.The pensioner and spouse or common-law partner have to make a joint election in prescribed form with their income tax returns for the year on or before their filing due date. The new Form T1032 is now currently availableThe new Form T1032 is now currently available

12 Who will claim the tax withheld at source from the eligible pension income? The income tax that is withheld at source from the eligible pension income will have to be allocated from the pensioner to the spouse or common-law partner in the same proportion as the pension income is allocated.The income tax that is withheld at source from the eligible pension income will have to be allocated from the pensioner to the spouse or common-law partner in the same proportion as the pension income is allocated.

13 Will pension income splitting affect the pension income amount? The pensioner will be able to claim whichever amount is less: $2,000 or the amount of his or her eligible pension income after excluding amounts allocated to his or her spouse or common-law partner.The pensioner will be able to claim whichever amount is less: $2,000 or the amount of his or her eligible pension income after excluding amounts allocated to his or her spouse or common-law partner. The spouse or common-law partner will be able to claim whichever amount is less: $2,000 or the amount of his or her pension income that is eligible for the pension income amount, including allocated pension income.The spouse or common-law partner will be able to claim whichever amount is less: $2,000 or the amount of his or her pension income that is eligible for the pension income amount, including allocated pension income.

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

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

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

17 If pensioners intend to split pension income when filing their returns, can they ask for a reduction of tax being withheld from the eligible pension income during the year? The CRA cannot approve a reduction of tax withheld at source based on an election to split pension income.The CRA cannot approve a reduction of tax withheld at source based on an election to split pension income.

18 Example 1 Rosco and Virginia are 62 and retired. Rosco has no income; Virginia has a $50,000-a-year pension. She can split her income with Rosco even though she’s under 65, because it’s pension income.Rosco and Virginia are 62 and retired. Rosco has no income; Virginia has a $50,000-a-year pension. She can split her income with Rosco even though she’s under 65, because it’s pension income. Combined after tax-income before splitting : $39,400Combined after tax-income before splitting : $39,400 Combined after tax-income after splitting : $43,100Combined after tax-income after splitting : $43,100 Income boost: $3,300 a yearIncome boost: $3,300 a year

19 Example 2 Tom and Nicole are 64. Tom has a $70,000 pension and Nicole has no income. Otherwise, they’re in the same position as Rosco and Virginia.Tom and Nicole are 64. Tom has a $70,000 pension and Nicole has no income. Otherwise, they’re in the same position as Rosco and Virginia. Combined after-tax income before splitting: $53,400Combined after-tax income before splitting: $53,400 Combined after-tax income after splitting: $58,800Combined after-tax income after splitting: $58,800 Income boost: $5,400 a yearIncome boost: $5,400 a year

20 Example 3 Bob and Margaret are 67 and have applied for OAS. Bob receives $60,000 a year from his RRIF, $30,000 from consulting work, and $10,000 from CPP. Because his income is high, all of Bob’s OAS is clawed back. By splitting his RRIF income with Margaret, Bob pays less tax and gets most of his OAS back.Bob and Margaret are 67 and have applied for OAS. Bob receives $60,000 a year from his RRIF, $30,000 from consulting work, and $10,000 from CPP. Because his income is high, all of Bob’s OAS is clawed back. By splitting his RRIF income with Margaret, Bob pays less tax and gets most of his OAS back.

21 Bob and Margaret cont’d Combined after-tax income before splitting: $76,500Combined after-tax income before splitting: $76,500 Combined after-tax income after splitting: $85,900Combined after-tax income after splitting: $85,900 Income boost: $9,400 a yearIncome boost: $9,400 a year

22 Can you afford to retire? Review the following scenario calculating the net cash flow while working to the net cash flow in the year following retirement.Review the following scenario calculating the net cash flow while working to the net 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 income from a post-retirement business.Spouses split $12,000 in partnership income from a post-retirement business.

23 Can you afford to retire? (2006 Cash Flow) IncomeS1S2Total Gross87,23612,43799,673 RRSP(5,416) -(5,416) Union Dues (564)(45)(609) Donations(8,056) -(8,056) CPP(1,911)(553)(2,464) EI(727)(56)(785) Tax(15,492)(141)(15,633) Net Cash 55,06811,64266,710

24 Can you afford to retire? (2008 Cash Flow) IncomeS1S2Total Gross39,36943,32682,695 RRSP000 Union Dues 0(45)(45) Donations(8,056) 0(8,056) CPP000 EI0(56)(56) Tax(3,072)(7,363)(10,435) Net Cash 28,24135,86264,103

25 Can You Afford to Retire? (what happened?) The reduction of Gross Combined Income of $16,978 is offset by a reduction in RPP/RRSP, union dues, CPP, EI and income tax totalling $14,371, leaving a net cash shortfall of only $2,607.The reduction of Gross Combined Income of $16,978 is offset by a reduction in RPP/RRSP, union dues, CPP, EI and income tax totalling $14,371, leaving a net cash shortfall of only $2,607. Questions:Questions: –Can S1 afford to work(gas, clothing, tranport) –Can S2 stand having S1 around 24/7?

26 Buyouts… Can timing of buyout be deferred?Can timing of buyout be deferred? –Portions such as retiring allowance –Unused vacation time/sick day pay out How much can be sheltered into an RRSP?How much can be sheltered into an RRSP? –Through direct transfer (subject to limits) –Available RRSP contribution room

27 The end of the spousal RRSP? Consider the following opportunity:Consider the following opportunity: –Stop contributing to spousal RRSP for 3 years –Draw money out of spousal RRSP (at a lower tax rate) –Re-invest money into personal RRSP at higher tax rate

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

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