For 2007, taxpayers who are married or living in a common-law relationship will be able to transfer up to 50 per cent of qualifying pension income to the tax return of their spouse. This can save a significant amount of tax, in situations where the pensioner is in the higher tax bracket, especially if that person's OAS has been partially or fully clawed back.
This is good news even if you do not belong to a company pension plan, because once you hit age 65, a number of different types of income qualify as "pension income." These include all amounts showing up on line 115 ("Other pensions or superannuation") which then generate the $2,000 pension income credit amount on line 314.
Included is income from annuities purchased with RRSP or DPSP money, regular RRIF payments, the interest portion of non-registered annuity payments and amounts accrued under certain life insurance policies and annuities.
For a pensioner under age 65, only company pension income qualifies, or any amounts in the paragraph above, which came about as the result of the death of a spouse.
OAS and CPP never qualify for this transfer, although CPP can be split between spouses by applying directly to CPP for such a split.
The transferred amount is listed on the new form T1032 and provides a deduction from net income at line 210 for the transferring spouse and an addition to income at line 116 for the transferee.
As well as potentially saving income tax for the couple, careful planning can also reduce the OAS clawback and increase tax credits that might otherwise be lost. Be cautious, however, as transferring the income to a lower-income spouse who is now collecting a significant amount of tax credits could result in the elimination of these.
How do you decide how much to transfer? Good question.
When this was first announced, my first thought was that this was going to be the best display of the power of tax software ever, as they will all have an "optimizer" button you will push to find out the right amount to transfer.
Boy, was I disappointed! It appears from my research that the only consumer software to provide this automatically is UFileTM (and its professional-strength big brother DTMaxTM) from DrTax Software Inc.
The $800-plus professional software we use (which shall go unnamed) does not yet provide any optimization utility. You can imagine I am not amused.
QuicktaxTM, the big seller in consumer software, does not automatically calculate the amount either, according to the representative we phoned.
I ran a number of scenarios through UFileTM, choosing to override the MaxBack option and let it run, and saw the effects. It gave me an exact amount of pension to transfer, and automatically transferred medical expenses, donations and other transferable amounts to maximize credits and minimize tax. It even suggested cases where some donations should be carried forward to the next year.As Joanne Birtch, VP of Marketing with DrTaxTM told me, "Taxpayers deserve to have the right amount transferred." I agree. It should not be a hit-and-miss, trial-and-error process. Only UFileTM seems to have mastered the complex programming required. ($29.99, at Future Shop, Best Buy and online at UFile.ca. It provides automated carryforwards from QuickTaxTM, and TaxWizTM.)
In many cases, the optimal transfer is the full 50 per cent allowed. However, if both spouses have pension or other income, then that might not be the case. As well, choosing which spouse claims other discretionary amounts like medical expenses, donations or disability amounts is also important, and the optimal transfer amounts may change based on the pension split.
If you qualify for this split, take your time or get some professional advice on maximizing your potential benefit. If you are still shopping for software, UFileTM appears to be your choice for the pension splitting, and it does a great job on everything else.
Above all, have fun!
David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. You can e-mail him at dchristianson@wellwest.ca.
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