Even as senior-citizen taxpayers get set to enjoy the right to split pension income between spouses starting with their 2007 tax returns, Canadian tax professionals say it’s unlikely that we will see an extension of full income-splitting for all Canadian couples — at least, in the near future.

“I don’t think we’ll see broad-based income-splitting any time soon,” says Jamie Golombek, vice president of tax and estate planning at AIM Funds Management Inc. in Toronto. “The government seems to be focused on broad-based tax cuts instead.”

As part of the now infamous Halloween 2006 announcement on the taxation of income trusts, Finance Minister Jim Flaherty had said the federal government would allow Canadians over 65 to split up to half of eligible pension income with a spouse. Eligible pension income generally includes income from a registered retirement savings plan, an annuity or a registered retirement income fund.

The move was designed to assuage the concerns of pensioners, many of whom had come to rely on the relatively high and steady income that the trusts provided. The tax changes — to take effect in 2011 — have effectively killed the market for new trusts and depressed the distributions and prices of existing ones.

“Pension-splitting is something a lot of people support,” Golombek says. “You have many situations in which you have one person who has worked his or her whole life, and he or she is supporting the couple. The couple has pension income and it’s taxed in the hands of the one person. It makes sense that the couple, who are going to use the money together in retirement, can pay taxes on it together.”

Dave Ablett, senior tax and retirement specialist at Investors Group Inc. in Winnipeg, agrees: “Where you have spouses with fairly large differences in pension income, you’re going to see some overall fairly significant tax savings for them.”

At the time of the pension-splitting announcement, Flaherty acknowledged that the government would also consider extending income-splitting to all couples. But in the year or so since that acknowledgement, the Conservatives have been very quiet on the topic, indicating the issue might be off of the Department of Finance’s list of priorities.

“The evidence of that is the most recent economic statement,” Golombek says. In that statement, issued on Oct. 30, 2007, the government proposed broad-based tax changes, including a further cut to the goods and services tax, an increase in the basic personal amount, a reduction in the lowest personal income tax rate and cuts to both corporate and small-business tax rates. The proposals, some of which fulfilled election promises, were expected to cost the government $60 billion in tax revenue over five years. The government did not mention full income-splitting in the Oct. 30 economic statement.

Most tax experts believe that Ottawa has probably shied away from introducing broad-based income-splitting because it’s concerned about potential lost tax revenue — full income-splitting would cost the government an estimated $5 billion a year — and because income-splitting is somewhat of a contentious issue, with both strong proponents and detractors.

Supporters argue that it’s unfair that couples who have one high-income earner and a low- or no-income spouse pay more taxes than does a dual-income couple who earn a similar amount in total. For example, a couple with one spouse earning $70,000 a year will pay more income taxes than a couple with two earners who each bringing in $35,000. Income-splitting, supporters argue, merely levels the playing field.

Supporters also contend that many other countries, including the U.S., effectively allow income-splitting because they give couples the right to file joint tax returns. Canada’s tax system is, therefore, out of step.

Opponents of income-splitting argue that the comparison of dual- and single-income families does not take into account the extra burden a dual-income family carries. They argue a dual-income family will have to expend more resources to take care of the home and provide child care. The dual-income household, therefore, has more need of tax relief.

Detractors also say that income-splitting provides a disincentive for the low-income spouse — which, in practice, is usually the woman — to work and earn income. And income-splitting provides no benefit to either single-parent families or unattached individuals.

Although many tax practitioners prefer not to wade into the social-policy pros and cons of income-splitting, they do acknowledge that full income-splitting would represent a significant shift in Canadian tax policy. “It would be a radical change,” says Peter Megoudis, senior tax manager of global wealth and employment solutions at Deloitte & Touche LLP in Toronto.

@page_break@There are a number of strategies for income-splitting. A popular one is having the higher-income spouse loan the lower-income spouse money at the government-prescribed rate of interest. Investment income earned above that prescribed rate can be taxed in the hands of the lower-income spouse.

There are also other ways to split pension income, including using spousal RRSPs and sharing Canada Pension Plan benefits, in addition to the expanded pension-splitting rights announced by the government in October 2006.

The Investment Funds Institute of Canada, in a submission to the House of Commons standing committee on finance last August, asked the government to look at what IFIC viewed as perceived discrimination in the taxing of pension benefits.

The splitting of eligible pension income is limited to those aged 65 or older, but the splitting of pension benefits from a defined-benefit pension plan can occur before age 65. IFIC claims that this leaves Canadians not fortunate enough to have employee plans at a disadvantage, and recommended that the age for both forms of pension-splitting be lowered to 55. The government, so far, has rebuffed the proposal, says Golombek, who serves as chairman of IFIC’s tax committee.

Although the government seems to have put greater pension-splitting or income-splitting on the back burner, some tax practitioners believe things could change after an election.

“I can see the government — if it were to gain a majority and if it continues to run surpluses,” Megoudis says, “potentially bringing in [full income-splitting].” IE