At issue
In recent years, the federal government has taken steps to address concerns it has about the inappropriate use of some retirement income plans and other registered vehicles. This includes the introduction of ‘advantage’ and prohibited investment rules applying to RRSPs, TFSAs, IPPs and RCAs.The 2012 Budget took direct aim at abusive practices associated with some RCAs – retirement compensations arrangements. New rules were prompted by certain RCA practices that lead to unintended tax benefits. Impugned activities included large contributions being stripped out of an RCA while claiming tax refunds, and the use of insurance products to allocate costs to an RCA while benefits arose outside the plan.
Somewhat lost in those policing measures (at least to this writer, though I suspect I’m not the only one) was a favourable change for some RCA beneficiaries, enabling pension income splitting in some circumstances.
Pension amount credit – ITA 118(7) “eligible pension income”
Section 118 of the Income Tax Act is a definitional section for personal tax credits, including “eligible pension income” for the purposes of determining the pension amount tax credit. This in turn rests on the definitions of “pension income” for those 65 and over, and “qualifying pension income” for those who have yet to reach age 65.
Pension income splitting was introduced for the 2007 taxation year, allowing a recipient to allocate up to 50% of certain income to a spouse for tax purposes. The foregoing definitions for pension credit qualification (with some amendments) were effectively shared with the new pension income splitting election. (And see ITA s.60.03 below.)
Income from an RCA is not included in any of these definitions.
2013-0497761E5 – Income splitting for RCA income
A letter sent to the Minister of National Revenue in June, 2013 sought clarification whether distributions out of or under an RCA may be eligible for pension income splitting. In response, the CRA representative recounted the general rules for pension income splitting, and specifically the absence of RCA income from the definition of eligible pension income.
However, for the 2013 taxation year and onward, amendments to the Income Tax Act now allow for RCA payments to qualify for pension income splitting in limited circumstances. “In general, the conditions that must be satisfied are the following:
- the taxpayer is at least 65 years of age,
- the RCA payments must be in the form of life annuity payments and be supplemental to a pension received out of a RPP, and
- the RCA payments to be split cannot exceed a limit specified in the Act ($94,383 for 2013) minus the taxpayer’s other eligible pension income.”
Pension income splitting – ITA 60.03
This section provides definitions and the effect of making a pension splitting election. It includes its own definition of “eligible pension income”, which since enactment in 2007 had been merely a direct importation of the s.118(7) definition. An amendment proposed in the 2012 Budget and later enacted that year amended the definition in 60.03, as summarized generally in the foregoing CRA letter.
Very importantly, note that the amended section does not extend this favourable treatment of RCA income to individual pension plans (IPPs) with fewer than four members where at least one of them is related to a participating employer in the plan.
Practice points
- Generally, RCA income continues to be ineligible for pension income splitting except in these limited circumstances where the plan supplements RPP income.
- Non-arm’s length IPPs will likely not qualify for pension splitting under this exception.
- Be careful as some government sources may continue to show the general exclusion of RCA income from pension income eligibility (without reference to this exception), including for example the CRA’s own webpage explaining “eligible pension income” (at time of writing in October 2013).
