Act fast on pension splitting

CRA’S Netfile electronic tax-filing service for 2011 returns opened for business on Monday this past week, marking the unofficial start of tax season. While there’s not a lot of retroactive tax planning that can be done for 2011 when you file your return, there is at least one potential tax savings opportunity for Canadians who have pension income, including RRIF withdrawals, who also have a spouse or partner.

Pension income splitting, first introduced for the 2007 tax year, allows Canadians who received “eligible” pension income to split up to half of that income with their spouse or common-law partner.

Pension splitting will save you tax if your spouse or partner is in a lower tax bracket than you but can also help you preserve some or all of your Old Age Security (OAS) benefits if you find that you were subject to the clawback in 2011 because your net income was over $67,668.

To reap the benefits of pension splitting for 2011, both you and your spouse or partner must complete Canada Revenue Agency Form T1032, “Joint Election to Split Pension Income” and file the forms with your returns.

Just learning about this now and think you may have missed out on prior years? You may still be able to catch up. Under the Income Tax Act, a late-filed pension-splitting election can be made up to three calendar years after the filing due date for the year to which the election applies. So, a 2008 tax year pension-splitting election can be made until the end of 2012, three years after the April 30, 2009 filing due date for the 2008 tax return.

But, as a recent CRA technical interpretation points out, even if you file the election by Dec. 31, the CRA’S hands may be tied and it may precluded from accepting your pension-splitting election due to the expiry of the “normal reassessment period.”

This period lasts three years from the date printed on your Notice of Assessment. So, if you filed your 2008 return in late February 2009 and got assessed a couple of weeks later, say on March 15, 2009, the CRA can only reassess you until March 15, 2012.

A special rule, however, lets the CRA reassess you within 10 calendar years after the end of a taxation year to either alter your refund or reduce the amount of tax, interest or penalties payable for that year.

So, while the CRA could reassess you beyond the normal reassessment period to reduce your tax payable as a result of a late-filed pension-splitting election, if the effect of the election is to simultaneously increase your spouse or partner’s tax payable, the spouse’s return could not be reassessed and the CRA would not accept the late-filed election even if it was filed by the Dec. 31 deadline.

So, if you think that pension splitting may have helped you in 2008, the clock may be ticking on your late-filed election so act quickly!