By Ray Turchansky
Canwest News Service
Personal Final Planning
Wednesday, February 06, 2008

Also published in:

Lost in the furor over federal Finance Minister Jim Flaherty's proposed taxation of income trusts on Halloween of 2006 were new rules for splitting pension and registered retirement income.

Adrian Mastracci, “fee-only” portfolio manager at
KCM Wealth Management in Vancouver, says, “There are instances when investing outside an RRSP makes sense.”

The rules quietly were passed into law last June, but some won't be taken advantage of until people file their 2007 income tax returns this spring.

"Pension splitting is probably one of the biggest tax changes in decades, in terms of the amount of tax savings this can mean for pensioners," says Jamie Golombek, vice-president, taxation and estate planning with AIM Trimark.

Take for example the Edmonton couple of Victor Poulin, 72, and wife, Leora, 70. During 2006, Vic was in the 22 per cent federal marginal tax bracket, while Leora was paying 15.25 per cent.

Both had Alberta Teachers Pension Plan income, but Victor's was about $25,000 greater than Leora's. He also had some registered retirement income fund income, while Leora didn't. The result was Vic had roughly twice as much taxable income as his wife.

Had the new pension and retirement income splitting rules been in place for 2006, they would have paid a combined $640 less in income taxes.

"That would have been nice," said Vic, who has been following developments with much interest.

The benefit is even greater for people living in provinces that have progressive tax rates, unlike Alberta, which has a single rate. PricewaterhouseCoopers reports tax savings could be as much as $15,000 for some couples.

Since 1987, spouses and now same-sex and common-law partners have been able to split CPP benefits, as the Poulins do.

Now, a person age 65 or over may elect to transfer up to 50 per cent of income received from a company pension, a registered retirement savings plan annuity, a RRIF or locked-in RRIF, plus a deferred profit sharing plan.

A person under age 65 only may transfer up to 50 per cent of income from a company pension, or an RRSP or DPSP annuity or RRIF or LIF only if payment resulted from the death of a spouse or common-law partner.

"The age of the transferee is irrelevant," notes Golombek. "If an 80-year-old has pension income and remarries a 20-year-old, they can transfer up to half of that pension income to the spouse."

People may not split payments from Old Age Security, the Guaranteed Income Supplement, an RRSP withdrawal or a retirement allowance.

Unlike splitting CPP benefits, which is done in terms of the amount you actually receive, pension and registered income splitting is accomplished through a new election using form T1032 on your income tax return.

Furthermore, people now do not have to collapse their RRSPs until the end of the year they turn age 71 instead of age 69; may continue to contribute to an RRSP until age 71; do not have to make the minimum RRIF withdrawals for ages 69 and 70; and may convert an RRIF back to an RRSP until the end of the year they turn 71.

Splitting pension and registered income has a number of other effects.

"Potentially, you've got doubling of the pension credit (on $2,000 of pension income), if you've got the 75-year-old with pension income transferring to the 20-year-old, that qualifies for the pension credit," says Golombek.

"You can look at OAS clawback strategies. For anyone getting OAS clawed back with income around $64,000 or $65,000, then any amount of income over that clawback number can be rolled over to a spouse or partner and protect the Old Age Security."

"The age credit is also based on income, so you have some opportunities there."

As for the theory pension and registered income splitting eliminates the need for spousal RRSPs, he notes: "If you don't have a defined benefit pension plan, you might want to contribute to a spousal RRSP, so that if you want to retire before age 65, your spousal can legitimately income split before age 65."

Portfolio manager Adrian Mastracci of KCM Wealth Management Inc., in Vancouver admits there are instances when investing outside an RRSP makes sense, such as for people in lower tax brackets before retirement. Otherwise, he says: "There are three good reasons to invest in RRSPs: long-term tax deferred growth, future withdrawals at (ideally) lower tax rates, and immediate deductions for tax purposes."

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.