Avoid pension-splitting confusion

Introduced for the 2007 tax year, pension income splitting allows a taxpayer to split up to half of his or her pension with a spouse or partner.

This can mean substantial tax savings if one spouse or partner is in a lower tax bracket compared to the other.

Pension splitting can be used to preserve Old Age Security benefits that may otherwise get clawed back if the recipient spouse or partner’s income is above the threshold ($71,592 in 2014).

What type of income qualifies to be split? Generally, any pension income that’s eligible for the $2,000 federal pension income credit. This can include annuity-like payments from a pension plan (regardless of age) and, once the client reaches age 65, RRIF withdrawals.

Read: Help clients with pension withdrawals

A recent court case, decided in January 2014 (Cantin v The Queen, 2014 TCC 20), dealt with the type of income that qualifies for splitting.

The facts

Jocelyn Cantin worked at Hydro-Québec for many years and has suffered from a disability since 1994. He became eligible for long-term disability benefits under an employer-sponsored Industrial Alliance insurance policy. When he turned 65, his benefits ended and were replaced, under the terms of the policy, with pension supplement payments.

For 2009, Cantin received a T4RIF (Statement of Income from a Registered Retirement Income Fund) for $10,486 in respect of RRIF withdrawals and a T4A slip (Statement of Pension, Retirement, Annuity and Other Income) for $15,954. These slips totalled $26,440.

Cantin wanted to split his pension income with his wife, since she was in a lower tax bracket. For the 2009 tax year, the couple jointly filed Form T1032, with $13,220 (50% x $26,440) as the split-pension amount.

CRA had no problem with the split RRIF income; but it denied a deduction for half the amount of the disability insurance payments, saying it doesn’t qualify for splitting under the Income Tax Act.

Read: Target benefit plans could relieve pension woes

Taxpayer’s position

Cantin disagreed, arguing the Industrial Alliance payments are a retirement pension and thus should be deductible, even though they’re not from a pension fund. He further argued that the benefits Industrial Alliance paid him “constitute an annuity for services already rendered and are, therefore, a life annuity and not disability insurance benefits.”

CRA’s position

CRA’s view was that the Industrial Alliance payments “are not in any way a pension.” It stated that for income to qualify for pension splitting, it has to come from a pension plan and not a disability insurance plan. An Industrial Alliance representative testified her company is responsible for managing Hydro-Québec’s long-term disability insurance plan, but is “not at all responsible for Hydro-Québec’s retirement plan.” She also stated that amounts Cantin received were paid under a long-term disability insurance plan, not a pension plan.

The ruling

The judge reviewed the insurance policy’s wording, confirming the contractual agreement between Industrial Alliance and Hydro-Québec was for a long-term disability insurance plan, and concluded there was “nothing in the wording of the insurance policy that indicates an intention to create any type of pension plan.” The fact that disability insurance continues to be paid after age 65 as a “retirement pension supplement” doesn’t mean those benefits are converted into retirement pension payments.

The judge concluded that payments from a long-term disability insurance plan don’t count as pension income and therefore don’t qualify for pension income splitting.

Read: Surprise! Corporate pensions are okay

clients are baffled

Almost half of Canadians (56%) use an accountant or professional service to complete their tax returns, finds a survey by Thomson Reuters.

Further, 42% look to professionals for financial advice. Canadians cite confusion and time restrictions among the most common sentiments toward filing their tax return.

“Canadians need to be an advocate for their own personal finances—tax season is a perfect opportunity to do financial review,” says Malcolm Campbell, VP Professional & Consumer Software & Services, Thomson Reuters Canada.