Pension at Age 55 vs. Lump Sum Option at age 54/11
Income splitting announced by Federal
Government on October 31, 2006
When Finance Minister Flaherty dropped his income
trust bombshell on Halloween, he also announced the
Federal Government's intention to introduce a couple of
Income Tax Act amendments that would benefit pensioners
and seniors. One of these - pension income splitting -
is the subject of this memo.
Under the proposed income tax amendments, taxpayers
would be able to split with their spouses up to 50% of
their "eligible pension income" for income tax purposes.
Where a taxpayer with "eligible pension income" has a
spouse who is in a lower tax bracket, this income
splitting can potentially reduce the couple's combined
income tax payments significantly.
Under the proposed pension income splitting amendment
to the Income Tax Act, "eligible pension income" would
include the following:
- For individuals age 65 and older: lifetime
pension payments from a registered pension plan
(such as the CPR pension plan), a registered
retirement income plan (RRSP) and a registered
retirement income fund (RRIF).
- For individuals under age 65: lifetime pension
payments from a registered pension plan, but NOT
RRSP/RRIF payments.
A CPR employee who retires at age 55 would be able to
income split up to 50% of his/her CPR pension with
his/her spouse starting at his/her retirement date.
However, if the employee chooses to terminate employment
shortly before age 55 in order to receive a lump sum
transfer from the CPR pension plan, he/she would not be
able to benefit from the income splitting option until
reaching age 65, thereby foregoing potential income tax
savings for the next 10 years.
The Fine Print: Lump sum payments from a pension plan
are transferred to a locked-in version of an RRSP or
RRIF. Although Flaherty's announcement did not mention
the locked-in versions of these vehicles, it is expected
that these locked-in versions would also be excluded
from income splitting whenever RRSPs or RRIFs are
excluded (i.e., before age 65).
Greg Hyatt
Director, Pension Plan Management
Canadian Pacific Railway |
