The Department of Finance is clearing the way to allow higher-income spouses with pension income to be able to say to their lower-income spouses, "what's yours is yours and what's mine is ours!" Well, maybe not for all of their worldly possessions, but as for paying taxes on pension income, "what's mine is ours" will be a reality for 2007.
In conjunction with the bombshell that Finance Minister Jim Flaherty dropped on income trusts on October 31, 2006, came the silver lining of a Tax Fairness Plan for Canadian seniors. The Plan delivers over one billion dollars of new tax relief annually to Canadian seniors from two proposed tax changes:
- an increased age credit amount, and
- income splitting for pensioners
Increased Age Credit Amount
The age credit is a non-refundable tax credit for Canadians 65 years of age and older. The amount eligible for the age credit was increased by $1,000 to $5,066 effective January 1, 2006. This results in roughly $150 of additional income tax relief for 2006 for lower and middle-income seniors. For 2006, the age credit is phased out beginning when net income exceeds $30,270, and is eliminated entirely when net income reaches $64,043.
But, while $150 in tax savings might allow you to buy a few more gifts for the grandchildren, the serious tax relief is in the pension income splitting opportunities. Bring on the big-screen TV and the Caribbean cruises!
Pension income splitting
Beginning in the 2007 taxation year, Canadian residents who receive income that qualifies for the existing pension income tax credit will be permitted to allocate up to one-half of that income to their resident spouse or common-law partner. For income tax purposes, the amount allocated will be deducted in determining the income of the person who actually received the pension income, and included in computing the income of the person to whom some or all of the pension income is allocated. In all likelihood, this will increase the transferee's tax payable. Consequently, both persons must agree to the allocation in their tax returns for the year in question.
The allocated pension income will retain its character and will be treated as the same type of income of the lower-income spouse. This means that some couples will receive a second pension income tax credit where previously only one was available. As well, splitting their pension income could mean higher Old Age Security (OAS) entitlements due to reduced claw-back of the OAS for the higher-income pensioner.
Eligible pension income
For individuals aged 65 years and over, the major types of qualifying income that can be allocated to a spouse or common law partner are:
- a pension from a Registered Pension Plan;
- income from a Registered Retirement Savings Plan annuity; and
- payments out of or under a Registered Retirement Income Fund.
For individuals under 65 years of age, the major type of qualifying income that can be allocated to a spouse or common law partner is income from a registered pension plan. Old Age Security payments, Canada or Québec Pension Plan payments and payments from certain supplemental retirement compensations arrangements do not qualify for splitting under the new rules. The Canada or Québec Pension Plan does, however, have its own provisions for income splitting where the actual payments to the pensioner and spouse can be shared.
There is no age restriction for the spouse or common law partner who receives the income allocation.
So what's the bottom line? How much cash will this free up for that 60" plasma TV? Well, let's look at Tony & Cherie, Nova Scotia residents, each of whom has $5,800 in OAS income. Tony has $6,600 in CPP income and $75,000 in pension income, while Cherie has $5,400 in CPP income and $5,000 in pension income. In 2007, their combined taxes would be approximately $29,100. But, if Tony allocates $35,000 of his pension income to Cherie, their combined taxes will be approximately $24,300 - a tax reduction of $4,800! *
The greater the disparity in incomes, the higher the advantage of splitting pension income. Consider George & Laura, also Nova Scotia residents, each of whom also has $5,800 in OAS income. George has $5,100 in CPP income and $100,000 in pension income, while Laura has $5,100 in CPP income and no pension income. In 2007, their combined taxes would be approximately $40,000. But if George allocates $50,000 of his pension income to Laura, their combined taxes will be approximately $31,500 - a tax reduction of $8,500! *
As you plan for 2007, you may want to factor estimated tax savings from this change into your 2007 installments. Alternatively, if you leave them as they are, a tax refund and Caribbean Cruise next April might go together quite nicely. Check with your Collins Barrow advisor to determine how best to use these new tax-savings options.
Grant Galbraith is a tax partner in Collins Barrow's Halifax member firm.
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* Tax savings in other provinces will vary depending on applicable 2007 provincial tax rates.
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