IPPís:  Do Pension Income Splitting Rules Apply?

by John Mill LL.M.

• Income is taxed at lower rate;
• access to an additional pension credit;
• reduces OAS clawback.

For a senior couple on a fixed pension income with one spouse receiving a $100,000 annual pension and the other spouse receiving no income; the tax savings arising simply from splitting the pension income could be an additional $14,000 a year, tax free.

A solution for the incorporated business owner is an Individual Pension Plan (ìIPPî). An IPP is a provincially registered pension plan often described as a super size RRSP available to corporate owner managers and professionals.

But does an IPP qualify for pension income splitting? A quick survey of the internet indicates many different points of view with respect to the ability to split pension payments received from an IPP. Some say you cannot split IPP income, some say you can split IPP income if you annuitize the IPP, and others simply say you can split IPP income without any explanation.

The correct position is this:

- payments made directly from an IPP (a withdrawal) cannot be split;

- if you annuitize an IPP, the annuity payments can be split;

- if you have attained the age of 65, and transfer the IPP to a registered retirement income fund (ìRRIFî), the RRIF payments can be split.

For the technically minded it appears confusion arises from ITA s. 118 which sets out the differing treatment depending on age and s. 118 (e) which tells what pension payments are not eligible to be split:

(e) a payment received out of or under a salary deferral arrangement, a retirement compensation arrangement, an employee benefit plan, an employee trust or a prescribed provincial pension plan;

The confusion may arise because retirement compensation payments (ìRCAsî) are excluded and IPPs are registered provincial pension plans. However, IPPs are not RCA's or prescribed. ITA Reg. 7800 tells us what a ìprescribed provincial planî is:

7800.(1) For the purposes of clause 56(1)(a)(i)(C), subsection 56(2), paragraph 60(v), subsection 74.1(1) and paragraph 118(8)(e) of the Act, the Saskatchewan Pension Plan is a prescribed provincial pension plan.

Saskatchewan has the only prescribed provincial pension plan, and that pension plan has nothing to do with IPPs. The ITA confirms that an IPP pension payment qualifies in the two circumstances set out above:

118(7)(a)

(i) a payment in respect of a life annuity out of or under a superannuation or pension plan,

 

Ö

(iii) a payment out of or under a registered retirement income fund or under an ìamended fundî as referred to in subsection 146.3(11),

ABOUT THE AUTHOR John Mill LL.M. has practiced corporate law for more than 20 years. Ten years ago he decided to take his tax expertise to a new level; he completed a Master's degree in International Taxation and then wrote the text for a Knowledge Bureau certificate course entitled Cross Border Taxation. In the course of his taxation studies he noticed consistent references to life insurance which is a tax free product. Consequently he obtained an life insurance licence. He is currently working on his second book regarding the most effective use of retained earnings.