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Issue with split pension & income tax deducted


gdb
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Situation:  Spouse A has high pension income and Spouse B has much lower pension income, such that splitting pension income between Spouse A and Spouse B results in higher combined refund.  As part of the split pension calculation, UFILE appears to transfer a portion of the "income tax deducted" total from Spouse A's T4A slips to Spouse B in proportion to the split income amount, i.e. even though there was no income tax deducted at source for Spouse B, UFILE calculates a "income tax deducted" amount for Spouse B based on the amount of split pension transferred from Spouse A.  CRA has reassessed Spouse B twice in the last few years on the basis Spouse B is not entitled to claim a portion of Spouse A's "income tax deducted" amount, notwithstanding the pension income form which the "income tax amount" was deducted was transferred to Spouse B.

I assume CRA is correct, and UFILE's software incorrectly transfers a portion of the "income tax deducted" when pension income is split and, therefore, I need to override UFILE to leave all "income tax deducted" on Spouse A's return, notwithstanding that results in a higher refund to Spouse A and a higher tax payable to Spouse B. 

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I suspect your entry for the T4A income (pension) may be entered wrong and by doing this Ufile is completing a pension split, whereas CRA recognizes the correct income allocation and denys the split. What exactly is the income from?

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1 hour ago, TheTaxSmith said:

I suspect your entry for the T4A income (pension) may be entered wrong and by doing this Ufile is completing a pension split, whereas CRA recognizes the correct income allocation and denys the split. What exactly is the income from?

I read this a different way. The pension being split has no tax withheld. UFile transfers tax paid on other income sources along with the split, a CRA no no. But the CRA has no problem with the split itself.

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The pension income is set out on three T-slips - a T4A from Spouse A's registered pension plan, a T4A(P) (CPP income) and a T4A(OAS) (old age security).  The "income tax deducted" is from the registered pension plan T4A and from the T4A(OAS).  Because Spouse A's income is so high, his OAS is completely clawed back, i.e. he receives a T4A(OAS) with the full amount of OAS in Box 18/19 then the full amount of OAS in Box 22 as "income tax deducted", i.e. pension recovery tax.  All T4A slips were correctly entered but when the Ufile split pension function is invoked, Ufile allocates some of Spouse A's "income tax deducted" to Spouse B on a pro-rata basis to the amount of split pension income itself.  CRA has reassessed Spouse B twice in the last 3 years to deny her a credit for this allocated "income tax deducted", but have not made a corresponding adjustment to increase Spouse A's credit for "income tax deducted"

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Interesting given that information. Ufile does a very good job at splitting pension income and transferring the proportion for income tax. I still suspect it's a data entry problem. But the fact that this happened in the last 3 years I would suggest you contact CRA and ask them why they are revising your returns from the way they are filed. Did you try that and if so what was their response? The fact that they revised the returns should inspire you to call and ask why.

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If the pro rata share of T4A tax paid transferred to B is the same as the proportion of T4A pension passed to B, there is no problem since CPP and OAS can't be split. If the proportions differ, data entry is the likely suspect.

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It is most assuredly not a data entry issue - I've repeatedly checked that the information from all T4A slips has been inputted correctly.  It is equally clear Ufile transferred a portion of Spouse A's "income tax deducted" total from his T4A and/or his T4A (OAS), as Spouse B had no "income tax deducted" from any source - pension or otherwise - and yet line 43700 of her T1 shows a credit following Ufile's pension splitting (which, when added to the line 43700 total for Spouse A equals the total "income tax deducted" from Spouse A's T4A and T4A(OAS) slips).

My suspicion is that this issue has something to do with the fact Spouse A has his OAS entirely clawed back, notwithstanding he still receives an annual T4A (OAS).  As a result, he reports the full amount of OAS as income, but then also records the same amount of OAS as "income tax deducted".  I find this curious, as the actual tax Spouse A would pay on his OAS if it wasn't clawed back is only 30-40% of the amount he's credited as "income tax deducted" in Box 22.  This means he doesn't get any OAS income, but the fact the clawback is considered "income tax deducted" means he gets a $4500-$5000 credit towards his tax payable on his other income.  I suspect that CRA denies the transfer of a portion of the "income tax deducted" that Ufile transfers to Spouse B because CRA considers it to have been transferred from the amount set out in Box 22 of Spouse A's T4A (OAS), notwithstanding there was an even larger amount of "income tax deducted" in Box 22 of Spouse A's T4A from his pension fund.

I will be contacting CRA to clarify this issue and will provide an update.

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Wait a minute. Spouse A records the OAS as income but also records that same amount as tax deducted? Is that what the slip reports? Is there an amount on the slip for income tax deducted in box 22? Is there an amount in box 20? The pension split will be affected by the OAS income and clawback only, not the tax deducted on the slip.

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Ok so just 2 entries to be made. The amount of OAS and the Federal tax deducted. Not an uncommon situation. There is no way any of that tax gets transferred with respect to the pension income split. Only the proportionate tax from eligible pension income for the purpose of pension splitting can be transferred between spouses. Eligible pension income and the corresponding tax withheld are the only amounts that can be used for pension splitting. The fact that CRA revises your file every year is the clue and calling them to ask why is the possible solution.

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3 hours ago, TheTaxSmith said:

"There is no way any of that tax gets transferred with respect to the pension income split. Only the proportionate tax from eligible pension income for the purpose of pension splitting can be transferred between spouses. Eligible pension income and the corresponding tax withheld are the only amounts that can be used for pension splitting. The fact that CRA revises your file every year is the clue and calling them to ask why is the possible solution."

I don't disagree.  The problem is Ufile doesn't appear to differentiate between OAS tax withheld and eligible pension income tax withheld in allocating a portion of the tax withheld as part of splitting pension income.  After all, the tax withheld on a T4A(OAS) and a eligible pension income T4A-P are both set out in Box 22, so they're combined together, along with any other tax withheld from any other income on line 43700.  It will hopefully not be an issue this year because Spouse A had enought tax withheld on his T4A-P to cover the full amount of the tax withheld allocated to Spouse B but that wasn't the case in a couple of previous years, leading to reassessment of Spouse B.  I will be dealing with CRA on this matter in due course, but the issue I raised in my OP - that Ufile allocates T4A(OAS) tax withheld when calculating optimum split pension amounts - remains and I will be bringing the issue to Ufile's attention once CRA has confirmed the correct allocation.

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I know from my own return that UFile doesn't do any OAS tax transferring with 100% clawback. Also, the clawback is entered on line 42200, recovery of social benefits, not as tax paid. Why don't you run the returns without pension splitting to see if anything odd happens. Open T4A and pension income in the index and set splitting to no split. 

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To clear this up take a look at Step 5 on the T1032 Pension Split form. Review the tax at line 68040. That is the tax that is eligible to be be split from eligible pension income. Write that number down. Now go to the T-slips summary and look at the tax deducted from pensions eligible for the split. Add those taxes up and it will equal the amount from line 68040 on the T1032 form. If the two numbers are not the same then look at the difference and then look at the tax deducted from other slips. That will pinpoint the error. They should however be the same. In your previous post you stated that you had an eligible pension on a T4A-P slip. I trust that is a private or employer pension and not the CPP. The CPP income as reported on a T4A(P) slip is not an eligible pension for pension splitting. (That said there is a way to equalize Canada Pension Plan receipts, but it's not through the tax system.)

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16 hours ago, Curmudgeon said:

I know from my own return that UFile doesn't do any OAS tax transferring with 100% clawback. Also, the clawback is entered on line 42200, recovery of social benefits, not as tax paid. Why don't you run the returns without pension splitting to see if anything odd happens. Open T4A and pension income in the index and set splitting to no split. 

When you say "...the clawback is entered on line 42200, recovery of social benefits, not as tax paid", do you mean that you get a T4A(OAS) like the one I posted that reports the clawback in box 22 as "income tax deducted", you enter that amount as "income tax deducted" on Ufile, but Ufile somehow figures out it's not garden variety Box 22 "income tax deducted" and sends it to line 42200 "recovery of social benefits" and not to line 43700 "total income tax deducted"?  'Cause it sure doesn't do that on mine.

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