Pension-splitting is a dog’s breakfast

I always knew that the federal government’s new pension-splitting plan was complicated. But until I tried it myself, I didn’t realize exactly how complicated it really is. In fact, I am now convinced that the overwhelming majority of people who make use of this new break when they file their 2007 tax returns will not receive the maximum possible benefit.

That’s because there is nothing intuitive about determining how much pension income to split between spouses/partners. There is no easy formula that applies. There is apparently no tax preparation software available to the general public that can guarantee to do the calculation correctly in all cases (although it appears that UFile works in most situations). It really comes down to hit and miss and I fear that most people will have missed.

All of this became apparent to me in the aftermath of the column I wrote recently in my Internet Wealth Builder newsletter about tax preparation software. In it, I commented that UFile’s automatic pension-splitting optimization program did not work in my case. The folks at UFile, which is produced by a Canadian company called Dr. Tax, contacted me after the article appeared to express concern and, although they didn’t actually say so, I sensed a degree of scepticism. I suspect they believed I simply wasn’t applying the program correctly. They asked if I would send the files for my wife and me, using different names and SINs, so they could check it out.

They did and guess what? The program did not work correctly in our case. The UFile technicians discovered a coding flaw that generates incorrect results in cases of high-income taxpayers who meet certain conditions. They describe the situation as “very rare” but if you have net income of more than $103,000 and are using UFile for pension-splitting, contact the company for more details because there is a chance your return is not correct.

Since they were looking at our returns anyway, the UFile staff also took the time to work out the optimal pension split between my wife and I. The number they came up with was $13,346.78. That is not a figure I would have arrived at on my own in 100 years. But when I plugged it into Intuit’s QuickTax program (which does not offer a pension-splitting calculator) it worked perfectly and we reduced our combined tax bill by an impressive $446 over the pension transfer amount I had originally chosen!

Just to be sure, I experimented with other numbers on both sides of that figure. UFile’s calculation was correct; no other pension split produced a more favourable result. But the fact remains that their program did not work in my case (although I am sure it will next year). If I had not written the article, I never would have learned about the correct split.

Joanne Birtch, the company’s vice-president of marketing and new business development, told me that several behind-the-scenes variables were identified by her technical staff as contributing to the determination of the most advantageous figure. They included a number of provincial calculations. Since we are residents of Ontario, in our case they focused specifically on the Ontario surtax, health premium, and tax reduction. There is no way an ordinary tax filer can take account of all these factors.

After hearing all this from UFile, I discussed the situation with a professional tax preparer who also happens to be a former senior staffer with the Canada Revenue Agency (CRA). He was appalled at this news. “The whole mess is a dog’s breakfast,” he concluded. “How are people supposed to make any sense of this?”

The ideal solution would be for the CRA to put its computers to work to calculate the optimal pension split for everyone who qualifies. But it is not their job to redo your taxes or to ensure you pay as little as possible. They are a collection agency, not a tax preparation service.

So my best advice is to use tax software (try UFile if your income is below the trouble threshold). Spend some time experimenting with the numbers to get as close as possible to the optimum split. Since you should by now have filed your returns, if you discover that you could have saved more using a different split, use the T1ADJ form to submit the changes. It’s worth the effort.