Pension splitting discrimination

There are many parts of the Income Tax Act (ITA) where relevant distinctions are made as to income sources and taxpayer circumstances. Then there are the pension income splitting rules, which suffer from irrelevant source distinctions and in turn lead to discriminatory treatment of many taxpayers.

In an informal procedure case reported this past November (Hotte v. R.), the taxpayer brought a Charter challenge to the age 65 aspect of the pension splitting rules.

Dubious distinctions

The income-splitting provisions in the ITA rely upon a number of definitions to determine what income may be included for splitting. Chief among these definitions for these purposes are:

• All “pension income” if the person is 65 years or older; and
• Only “qualified pension income” if the person is younger than 65.

With the exception where there is a pre-deceasing first spouse, a person whose pension income arises solely out of RRSP/RRIF sources cannot split that income until age 65. For those who receive RPP source income, the splitting may commence before age 65.

Notably in this case, Hotte had both RPP and RRSP (life annuity) sourced pension income, and his challenge was based on the ineligibility of the latter source for splitting. After canvassing key Charter cases, the judge stated that Hotte had not led any evidence of a “disadvantaged class” or “prejudicial stereotyping” hinging on age 65.

Court limitations

As acknowledged by the court, “the choice of age 65 as the threshold was a policy choice open to Parliament to make and they have made it.” These comments flow from a letter from the Minister of Finance to Hotte that was entered into evidence. Here, in full, is the excerpt as it appeared in the case:

“The purpose of the age-65 requirement for RRSP annuity and RRIF income is to target the Pension Income Credit (upon which eligibility for pension income splitting is based) to retired individuals. Individuals have much greater personal control over the timing of withdrawals under RRSPs and RRIFs compared to RPPs. 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.”

Frankly, I don’t agree that there is a real concern about RRSP/RRIF holders acting in a strategic manner that is a threat to the retirement system, nor that RPP holders would fail to take advantage where possible. On the contrary, most people would see a much greater existing financial advantage for those entitled to large pension plans — often indexed government-guaranteed defined benefit plans at that.

In fact, the suggestion of the possibility of so-called advantages for RRSP/RRIF holders appears to have given way to the certainty of favouring RPP holders. Since the actual average retirement age is closer to age 60 than 65, the reality is that RPP holders have been granted increasing favour relative to RRSP/RRIF holders.

Next time or next budget?

Hotte made a valiant effort, but he did so self-represented under the informal procedure. Understandably he focused upon age eligibility, but arguably it is the prior characterization of the source/definition that pre-ordains the result.

Thus, a future taxpayer-litigant may stand a better chance by framing the issue in terms of source rather than taxpayer. This would focus the light on the unfair structural divide in the retirement system between RRSP/RRIF holders and RPP holders.

Better yet, maybe the forthcoming federal budget will formally recognize this inequity and put all retirees on an even footing.

Doug Carroll, JD, LLM (Tax), CFP, TEP, is vice president of tax and estate planning at Invesco Trimark Ltd.