All About Estates

TOSI and the estate planning – pension splitting

The pension splitting exception will allow a spouse who is 65 years of age to split income with his or her spouse or common law partner if the split income would be an excluded amount of the spouse who is 65 years old. These deeming provisions provide an opportunity to split income with spouses if certain conditions are met.

The following example shows how the pension splitting exception would apply:

  • Spouse A and Spouse B own respectively 95% and 5% of all the shares of a company (Investco).
  • Spouse A is over the age of 65 and Spouse B is age 60.
  • Investco carried on an active business for over 25 years.
  • Investco wound down the active business many years ago and now owns a marketable securities portfolio that require sporadic management decisions and investment activity.
  • During the period Investco was carrying on an active business, Spouse A was involved full-time in different aspects of the management and operation of the business.
  • Spouse B was never involved in the Investco business.
  • Spouse A is now retired.
  • Investco pays substantially all of its net investment income each year as dividends to Spouse A and Spouse B to augment their retirement income.

Dividends received by Spouse A would not be subject to TOSI as the shares held by Spouse A would qualify under the excluded shares exception. Dividends received by Spouse B would not be subject to TOSI on the basis that, had Spouse A received these dividends, it would be an excluded amount in Spouse A’s hands and Spouse A is over the age of 65.

Baby boomers who own shares of a corporation and approach the age of 65 have the opportunity to incomes split with their spouses provided that the spouse is a shareholder of the corporation. Consideration should be given to whether the shareholdings in the corporation should be restructured to include the spouse as a shareholder on the case that the spouse is not a shareholder already of the corporation to take advantage of the pension splitting exception.

About Derek de Gannes
Derek A. de Gannes: Senior Director, Private Client Services of RSM Canada. RSM Canada is committed to the highest level of integrity, quality and professionalism and provides clients with solutions in the area of Audit, Tax and Transaction Services. Email: derek.degannes@rsmcanada.com

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