Silver Threads: SPLITTING PENSION INCOME, SPLITTING TAX

Silver Threads column, This Week in Riverview, This Week in Moncton
8 September 2007
Income Splitting – What’s All the Fuss About?
By Wayne Harrigan

Last October 31, federal finance minister Jim Flaherty announced that beginning in 2007 senior couples will be able to split their retirement income for tax purposes. This will make a significant difference to many New Brunswick seniors. However, you will only notice the difference when you make out your income tax next spring. Pension splitting has been high on CARP's advocacy agenda. It was a campaign led by Dan Braniff, chairman of CARP's Georgian Bay Chapter, which brought together 22 national organizations representing two million seniors. Until now, many senior couples were taxed unfairly because of great differences in retirement income. Seniors have been pretty limited in what strategies they could use to lower taxes. They have been able to split Canada Pension 50/50 if that’s a benefit and could invest in spousal RRSPs for the lower-earning spouse. Canadian taxpayers were first allowed to contribute to spousal RRSPs in 1991. Under this strategy, a wage earner can allocate RRSP contributions to an RRSP owned by a spouse or common-law partner up to the maximum allowable amount. The announced changes affect all eligible pension income.
For individuals aged 65 years and over, eligible pension income includes lifetime annuity payments under a registered pension plan, a registered retirement savings plan or a deferred profit-sharing plan and payments out of or under a registered retirement income fund. For individuals under 65 years of age, eligible pension income includes lifetime annuity payments under a registered pension plan and
certain other payments received as a result of the death of the individual’s spouse or common-law partner.
Who is not helped by this change? It does not benefit single retirees or couples whose incomes are in similar tax brackets. But these taxpayers are not penalized in any way by these changes. Income splitting corrects a long-existing situation in Canada where retired couples were taxed unfairly. MP Garth Turner expressed his delight that the finance minister "has recognized that these people need recognition and this help. Today's retirees lived and worked in families where one spouse usually stayed home with kids, which means pension income now flows in through the hands of just one person. That increases the tax rate, and seriously impairs the lifestyles of millions of people on fixed incomes."Because we will only see the results of this policy change next spring when we calculate our 2007 taxes, it may be wise to take a close look at your current situation and how this may be altered for the better. A financial advisor or accountant may be able to help you fill in the blanks. It is important that taxpayers, and seniors pay a great deal of tax, benefit from these changes and we can only do that if we really understand what’s happening.