CN Pensioners Associations, Inc.

Splitting can help you retire earlier


Tax Expert

Financial Post (Oct 20/2007)

For more information visit Pension Income Splitting

Boomers may have a new tax opportunity available to them this year. The ability to split pension income with a spouse or common-law partner was passed into law in June, and will be effective for 2007.

This tax-planning technique may provide the incentive needed for Boomers to serious­ly consider early retirement.

Given the right set of cir­cumstances, they may be ahead of the game on an after-tax basis due to the substantial tax savings available.

Income that qualifies for splitting is the same income that currently qualifies for the $2,000 pension income credit. Since Boomers are under age 65, generally the only source of pension income that qualifies will be money drawn from an employer-­sponsored Defined Benefit plan.

By choosing to retire at age 55, for example, which is avail­able under the terms of some pension plans, and electing to draw a pension, the recipient would be in a position to allo­cate up to half that income to his or her spouse or partner.

If the spouse or partner is in a lower tax bracket than the pensioner, the tax savings can be substantial.

In addition, the spouse or partner could claim the $2,000 pension income credit for further tax savings.

Boomer couples who think they may benefit from such a plan should sit down with an advisor or tax accountant and do the math to determine whether early retirement might make financial sense.

And remember, just be­cause you've elected to receive an early pension does not mean you can't seek future employment to supplement your pension income.

What if you don't partici­pate in a Defined Benefit plan but save for your retirement through an RRSP?

In that case, you're out of luck as you can't split your registered savings with a spouse or partner until you're at least 65 years old.

In an attempt to respond to complaints about this in­equity, the government stated: "Without the age-65 eligibility rule, many individuals who are not retired could gain sig­nificant tax advantages well before they attain age 65 by arranging to withdraw money each year as RRSP annuity or RRIF income while still saving for retirement.

"Individuals in receipt of RPP income, on the other hand, generally have little con­trol over the timing of their pension payments - they usually only receive such pay­ments when they are retired."

Clearly, the law discrimin­ates against Boomers who wish to retire early but are not members of Defined Benefit plans.

For the legions of these people, the prior use of spous­al RRSPs may provide the tax savings needed to justify early retirement - or savings roughly equivalent to what would have been available through the new pension split­ting rules.

Jamie Golombek, CA, CPA, CFP, CLU, TEP, is the vice­-president, taxation and estate planning, at AIM Trimark In­vestments in Toronto.

Financial Post

For more information visit Canada Revenue Agency Pension Income Splitting