DEATH OF A SPOUSE – PENSION INCOME SPLITTING IN THE YEAR OF DEATH

We are often asked to assist in several areas for our client families after someone has passed. Many of the inquiries are estate related, and other are tax related. One question which often comes up is the ability to pension split for the year of death of a client. In Canada, we benefit from the ability to take advantage of tax credits and benefits based on family income. This is true for both married and common law partners, which can often result in less taxes owing for the combined family unit.

One of the most common forms to split income is that of eligible pension income which was introduced by the federal government in 2007. Taxpayers who receive eligible pension income are permitted to split up to 50% of that income with their spouse. Certain conditions of the income must first be met if the pensioner is 65 years of age or younger. Where the pensioner is any age the income can be from Life Annuity Payments from a superannuation or pension plan or the successor annuitant from RRIF payments. Where the pensioner is 65 years or older then income can include RRIS payments, LIF/LRIF payments, certain annuity income (DPSP, RRSP, Non-Registered), and qualifying amounts from a retirement compensation arrangement (RCA).

Splitting income in the year of death requires a little more careful examination, specifically when during the year does the death occur and had the income already been received prior to death, while also examining income received as a consequence of the death (received by the surviving spouse).

For the year of the death, eligible amounts received before death, the federal income tax act (Canada) permits the executor of a deceased pension to split eligible pension income with a surviving spouse or common law partner (CLP). Assuming no breakdown in the marriage prior to death, the amount can be split similar to years prior to death. If someone passed away in June of this year, 50% of the income received up to this point would be splitable (the first 6 month of the year). Tax rules no longer permit you to have a spouse or common law partner after death.

What about amounts received at death…such as an RIF? In situations where the spouse is named as the beneficiary of an RIF, under the income tax act, RSPs and RIFs at death are deemed to have been withdrawn just prior to death. Therefore, does this mean the RIF income was received prior to death? Per CRA’s interpretation, because an amount deemed received at death is not a “payment out of an RIF”, these amounts do not qualify as eligible pension income for purposes of the pension income splitting rules. However, depending on the circumstances (who receives the proceeds), there may be other ways to split this income.

If the spouse is a ‘qualifying survivor’ which can include a spouse, common law partner or financially dependent child, the spouse may request for the RIF to be transferred to their own RSP or RIF on an RRIF rollover basis. This would produce income for the spouse in the future when proceeds are withdrawn.

There are certain other factors to be considered for prudent planning with a spouse. In the event where a beneficiary is not a spouse, common law partner or financial dependent child, there is no opportunity to split the date of death amount, and the income would not qualify as eligible pension income.

As always, it is best to consult your tax professional on the specific treatment of this type of income and your own unique situation for opportunities.

Please don’t hesitate to contact us with any questions! Until next time!

Andrew Hawryluk
Wealth Advisor
Assante Financial Management Ltd.

The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd. This material is provided for general information and the opinions expressed and information provided herein are subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on the information presented, please seek professional financial advice based on your personal circumstances.