Pension Buyout and Tax Implications

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bluebutterfly

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We have had the pension evaluated from a pension rep and came up with the number that I am entitled to. The value of the asset.

This will be automatically transferred over into my name my portion; however my spouse wants to buy me outright so he gets his full pension amount.

This money will not come from his pension he has the funds to buy me out of his pocket.

I am okay with this, but there is some confusion if there is a tax implication.

I will have to re-invest this money at which time I will be taxed when I draw on it. If I am taxed when I receive it, it seems like I will be taxed twice.

As it is his choice to pay me out and I sign off all rights to his pension does anyone know? Do I have to claim this payment as income as it actually is a division of an asset in my mind no different then giving me the house.

Anyone in this situation I would welcome any input.

Thanks :confused:
 
No, this is not a taxable event.

Equalization for divorce is not taxable - it is already your money so to speak.

However, the cash payout to you now would be less than your half of the current value of the pension as those are 'pretax' dollars - this is where you need advice from someone who knows these things (someone paid by you, not your ex) to determine is the cash buyout value of your portion of his pension.
 
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I am having trouble finding out any of this information even from paid people.
The amount of the asset was done and paid for by a pension rep. That is where the number came from.
I have so many numbers in my head. I guess I am okay with the number and just wanted to know if there was a tax implication as my lawyer in responding to his decreased the amount at a 25% tax margin even though my spouse and I agreed that he would pay me the full value.
The funny thing is I am not even in a 25% tax bracket as I have a low income and her numbers did not even calculate correctly.
I just don't want to take this and then get dinged for tax.
Thank you so much for your reply.
I appreciate the info.
 
The main thing is to make sure you compare apples to apples.

Value now, value in future, pretax, posttax, cash, transfer, ...

If you research it enough you should get an understanding so you can make the right decision. It really overall should not be that hard.

If it is fair, then you and your ex should almost not care if you get bought out or not. The reason should only be a cleaner financial split.
 
I had an actuary review my pension for the value. Strangely--I had 2 different actuaries evaluate it, 3 years apart and they came up with nearly the same number. His lawyer, however, wants the tax rate lower so that he gets more of my pension (although he makes 3 x the money I do)-.......Still ongoing.

I paid for the actuary--not cheap--but I owned the pension.
 
I paid out my ex to keep my pension. The tax % is base on the payor tax margin not on the recipient.

You will get the full amount minus the tax margin. 25% is high if you live in Ontario. You can figure out what the rate should be by using this calculator and just put in you ex income.

Normally if you use an actuary, he does provide you all that info. The pension administrator should also be able to provide this as they will have to deduct the tax from source.

Canadian Income Tax Calculator 2013 | Life Insurance Canada
 
Thanks for responding.

What confuses me and I do apologize as I want to do what is fair and right. Why is the value if he chooses to buy me out and it is not coming from his pension taxed? I have to take that amount, re-invest and then get taxed again when I draw on it. Seems like I will be taxed twice.

What are the taxes for?
 
bluebutterfly said:
Thanks for responding.

What confuses me and I do apologize as I want to do what is fair and right. Why is the value if he chooses to buy me out and it is not coming from his pension taxed? I have to take that amount, re-invest and then get taxed again when I draw on it. Seems like I will be taxed twice.

What are the taxes for?
Click to expand...

The pension has a value today, of which you are getting your portion. By value I mean the actual value today of the stocks/cash/annuities etc that make up the current pension.

This value is pre tax (ie it will be considered income some day when your ex withdraws it during retirement). He will never see today's value - it will be taxed before he gets it.

So if you are getting a cash buyout, which you are, the current value of the pension is reduced to a post tax value equivalent, then you get your cut.

Now, you say that you might invest it, and then will be taxed on that. However, you will be taxed on the profit from the investment, not the investment itself. The remaining pension (your ex's portion), will also be invested, and he will pay the tax on the value increase as well when he withdraws the pension.

You could always put the money into an RRSP and then you will be the exact same position as your ex, but that is not really relevant to your question or if the buyout method is fair.

If he gives you a cash buyout of the current value of the pension (after applying a tax rate), you will both be in the same position and it will be fair.

I hope I have explained it well.
 
Best explanation I have had yet. Thank you so much. Have a lawyers appointment tomorrow so I would like to clear this up.

Thanks Again
 
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