The individual provinces and territories provide health care insurance and many provide subsidies for the cost of prescription medications for their residents. The cost of the programs and the amount of subsidies are often linked to the taxpayer's income. While splitting pension income may reduce income taxes, preparers need also to be aware of the possible negative effects on health costs for their clients.
Provincial Health Insurance
Most provinces build the cost of provincial health coverage into their income tax rates but three provinces, BC, AB, and ON levy a clearly identifiable fee for health insurance. In BC and AB, the fee is billed and paid directly. In Ontario, the Health Premium is calculated and paid along with the normal Ontario Tax.
BC and Alberta have premium assistance plans which are based on the couple's prior year net income (for BC) and the prior year's taxable income (for AB). Since transfer of pension income does not affect either the couple's combined net or taxable incomes, there are no effects in either province if pension income is split.
The Ontario Health Premium, on the other hand is calculated based on the individual's taxable income. Thus pension income splitting will affect the amount of the Ontario Health Premium. For low-income seniors, the result will often be a reduction in the premium if income is split. For higher-income seniors, the health premiums may rise, but not nearly as much as the amount of tax that may be saved by splitting of pension income.
Most provinces have a plan to help reduce the costs of prescription drugs for their residents and for seniors in particular. The majority of these plans have deductible or co-pay amounts that are based on a couple's combined net incomes. In those provinces, splitting of pension income will not affect the cost of prescription drugs. Some of the notable exceptions are:
Saskatchewan: The new flat rate for seniors comes into effect on July 1, 2008. Seniors will quality if their individual net income (based on 2006) is below the $64,044 threshold. If splitting of pension income in 2007 brings one spouse's income below the threshold and does not bring the spouse's above the threshold, it would appear that seniors may lose their eligibility for the Senior's Drug Plan once the base year becomes 2007.
Manitoba: Currently, the deducible for prescription drugs is based on the family total income. Since pension income splitting increases the transferee's total income but does not affect the transferor's total income, transferring pension income increases family total income. One would expect that the Manitoba government will adjust the criteria so that this anomaly will not affect the cost of prescription drugs for seniors before 2007 become the base year for determining the deductible amount.