Pensions Revisited

We'd like to thank all our readers who sent us feedback on our articles on pension income.  The following are some points brought up.
 
Is Pension Income Splitting Always a Good Idea?
There are instances where splitting of pension income between spouses or common-law partners can have more negative effects than positive.  One area not discussed in our previous article is the claiming of medical expenses.  Since medical expense claims are reduced by 3% of the taxpayer's net income, the possibility exists that the transfer of pension income could reduce or eliminate a claim for medical expenses. 
 
Since the credit for a medical expense claim is only 15% of the claim, adding $1,000 to a taxpayer's income will reduce the claim by $30 and the credit by $4.50.  This is more than offset by tax reductions for the transferor if he or she is a higher tax bracket, but if the two spouses are in the same tax bracket, the net effect may be negative.  The scenario, then, for this negative effect is
  • both spouses are taxable
  • both spouses in the same tax bracket
  • one spouse is claiming medical expenses
Where one of the spouses has no pension income, tranferring enough to claim the full pension income amount may still be beneficial although transferring more would be detrimental.
 
You should also look at the effects on provincial taxes as the brackets often do not coincide with the federal ones and the amount of the pension income credit will also vary for many provinces.
 
The effects of this election are not always straightforward so be sure to work out the optimum transfer for each client situation.
 
German Pensions
In our article on pensions from the Republic of Germany we mistakenly indicated that private pensions received by Canadian residents were not taxable in Canada.  In fact, such pensions are subject to taxation in Canada and will likely have income tax withheld which is eligible for the foreign tax credit.  We apologize for this error.