Tax Tip[] Pension Income

Pension Income Can Be Split in Year of Death

“Eligible pension income relating to the portion of the year in which both spouses were alive can be split.”

Section 60.03 of the Income Tax Act provides for the splitting of qualifying pension income between spouses for 2007 and subsequent years.

For the income-splitting provisions to apply, both spouses must be pensioners for the portion of the year in question (i.e., receive eligible pension income in the taxation year and reside in Canada on December 31) and both spouses must be eligible pension transferees (essentially all spouses, including common law).

On the death of a spouse, the surviving spouse is no longer considered married to the deceased. In a recent technical interpretation (2008-0275731E5), the CRA confirmed that, although the spouses are not considered to be married at the end of the year of death, that part of the eligible pension income relating to the portion of the year in which both spouses were alive can be split.

It is the CRA’s view that the calculation of the maximum amount that can be transferred is equal to 50% of the eligible pension income, pro-rated for the number of months (including any part month) that both spouses were alive, divided by the total number of months in the year in which the surviving spouse was alive. For example, if a spouse died in February, the maximum amount of the surviving spouse’s pension income that could be split and included on the deceased’s terminal return would be 50% of the surviving spouse’s eligible pension income times 2/12. Form T1032 will still have to be filed to permit the election to transfer the pension income. Presumably, that election can be signed by the deceased’s legal representative.

It is also the CRA’s view that the split pension amount cannot be included on the deceased spouse’s “rights or things” return.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Government’s Annoucement on Income Trusts & Pension Income

“New rules for income trusts and pension income.”

The Federal government made an announcement on October 31, 2006 proposing changes to the way that income trusts are taxed. This Tax Tip is not meant to be a detailed analysis of the announcement but rather to highlight some of the key issues.

Income trusts will now be taxed on the income distributed to unit trust holders. The tax rate will be 34% as of January 1, 2007 for those trusts that began to be publicly traded after October 2006. The tax rate for the years 2008 to 2011 will be 33.5%, 33.0%, 32.0%, and 31.5%, respectively. For those trusts that began to be publicly traded before November 2006, the new taxation of distributions will not apply until year ends in 2011. The income tax rate is made up of a basic federal tax rate, plus an additional rate in lieu of provincial tax. This additional rate of 13% is not a provincial tax rate but will be distributed to the provincesin some agreed upon manner. If income is not distributed to the unit trust holders, then it will be taxed at regular trust tax rates, which is the highest personal tax rate.

All amounts distributed from the income trusts will be treated as dividends. For Canadian resident unit holders, the dividends will be considered eligible dividends which are eligible for the new gross-up rates and higher dividend tax credit. For non-resident unit holders, the distributions will be subject to the withholding tax rate for dividends.

The government also made an announcement that Canadian residents who qualify for the pension income tax credit are able to split their pension income with their spouse. Essentially, the rules allow that up to one-half of the pension income can be allocated to the other spouse. This will apply for the 2007 and subsequent taxation years and the allocation must be made one year at a time. Both persons must agree to this allocation in their tax returns for the year in question.

At this time, the proposed legislation has not been issued.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.