Both the Federal and Ontario governments have announced their intent to allow seniors to split “eligible” pension income between spouses, starting in 2007. These new rules will provide an opportunity for significant savings to a large number of senior taxpayers. The greatest savings will be experienced by couples in circumstances in which one spouse will have income (which includes “eligible” pension income), in excess of $65,000, and where the other spouse has a much more modest income level.

“Eligible” pension income will generally include a regular pension annuity, collected after retirement by an individual who was a member of a Registered Pension Plan (RPP) during their working years, and will also include the receipt of “minimum” amounts received from Registered Retirement Income Fund plans (RRIF’s), received either a) after an individual attains 65 years of age, or b) as a result of the death of a spouse.

Where such qualifying income is received and where a material disparity in income levels between spouses exists, substantial savings will usually result. And the best part of this new opportunity is that no special structures are required and no significant advance planning is necessary in order to access the available savings. All that will be required is for the two spouses to agree, at the time of filing of their 2007 income tax returns, to a qualifying reduction in the amount of the eligible pension income reported on one of the spouses’ returns, and to an equal increase in the pension income amount to be included in the other spouse’s return. There is no requirement for a full split of this income to occur. Any amount between 0% and 50% of the eligible income may be transferred at the joint discretion of the two spouses. A transfer that takes place in 2007 will not need to be repeated in 2008 or future years, unless it is both desirable and beneficial for the parties to do so. There is no requirement for the recipient spouse to be 65 years of age. In fact, there are no restrictions on the age for the recipient spouse.

Where significant savings are available, they will result primarily from the following items. First and foremost, transfers from a taxpayer paying higher marginal tax rates (about 46%) to a taxpayer in a lower tax rate category (about 21%) can save up to 25% of the amounts transferred on a combined basis. Secondly, the old age security clawback might be partly or fully avoided through the resulting reduction in income of the spouse transferring pension income to the lower income spouse. Thirdly, the available $2,000 pension credit may be more fully accessed, in cases when it was not previously being used fully by the lower income spouse. In addition to these listed potential savings opportunities, lower income spouses with unused, but still available R.R.S.P. contribution room, may now be in a position where it is tax effective for them to make tax deductible contributions to their R.R.S.P.’s. This may not have previously been the recommended course of action.

If these new provisions appear to be applicable for you and your spouse, and you require assistance to maximize the savings available, do not hesitate to contact our D. J. B. professionals to assist you (contact numbers on reverse).