Income
Tax Act amendment - Pension income splitting
November
21, 2006
Brothers and Sisters,
Attachedis a message from Greg Hyatt (CPRail's actuary). Brother
Don Lesuk, our pension representative states,
" Bottom line, its a very good deal in particular for a single
income couple on pension, if both spouses have/had jobs and a
private pension to go with them this has little effect. This is
a significant change in taxation policy which will benefit many
of our members. This may signal a shift in taxation policy defining
family income versus personal income and taxing them proportionally."
Now, here's Mr. Hyatt's memo.
SUBJECT: LIFETIME PENSION AT AGE 55 VS. LUMP SUM OPTION AT AGE
54/11 - INCOME SPLITTING ANNOUNCED BY FEDERAL GOVERNMENT ON
OCTOBER 31st
When
Finance Minister Flaherty dropped his income trust bombshell
on Halloween, he also announced the Federal Government's intention
to introduce a couple of Income Tax Act amendments that would
benefit pensioners and seniors. One of these - pension income
splitting - is the subject of this memo.
Under
the proposed income tax amendments, taxpayers would be able to
split with their spouses up to 50% of their "eligible pension
income" for income tax purposes. Where a taxpayer with "eligible
pension income" has a spouse who is in a lower tax bracket,
this income splitting can potentially reduce the couple's combined
income tax
payments significantly.
Under
the proposed pension income splitting amendment to the Income
Tax Act, "eligible pension income" would include the
following:
*
For individuals age 65 and older: lifetime pension payments from
a registered pension plan (such as the CPR pension plan), a registered
retirement income plan (RRSP) and a registered retirement income
fund (RRIF).
*
For individuals under age 65: lifetime pension payments from a
registered pension plan, but NOT RRSP/RRIF payments.
A
CPR employee who retires at age 55 would be able to income split
up to 50% of his/her CPR pension with his/her spouse starting
at his/her retirement date. However, if the employee chooses to
terminate employment shortly before age 55 in order to receive
a lump sum transfer from the CPR pension plan, he/she would not
be able to benefit from the income splitting option until reaching
age 65, thereby foregoing potential income tax savings for the
next 10 years.
The Fine Print: Lump sum payments from a pension plan are transferred
to a locked-in version of an RRSP or RRIF. Although Flaherty's
announcement did not mention the locked-in versions of these vehicles,
it is expected that these locked-in versions would also be excluded
from income splitting whenever RRSPs or RRIFs are excluded (i.e.,
before age 65).
Greg Hyatt
Director, Pension Plan Management
Canadian Pacific Railway
