The use of  25% as the tax rate is almost always too high. When projected accurately, tax rates for defined benefit pensions are about 15%, except for police, firefighters, and teachers for whom they are about 20%. To justify a 25% tax rate for a defined benefit pension requires $85,000 of annual post-retirement income which most do not earn even when employed.

The discrepancy is most likely due to confusing the average tax rate when employed, when 25% is reasonable, with rates after retirement when income is lower. There may also be confusion between average rates on all income, and marginal rates on each dollar of extra income. Average rates are used because pensions are paid monthly over the course of a year.

Until January 1, 2012, actuaries supplied the tax rates for provincially registered pensions along with their valuations of the same. Under the Bill 133 pension division regime that commenced on January 1, 2012, the Family Law Value, (“FLV”), is provided by the plans themselves, but the plans are not obligated to provide tax rates and do not

Defined benefit pensions frequently have a Family Law Value in the hundreds of thousands of dollars so the discrepancy between 25% and 15% is material. In the following example this costs the non-pension holding spouse $10,000 in equalization.

	25% Tax	15% Tax
FLV of DB Pension	$200,000	$200,000
Tax Rate	25%	15%
Tax	$50,000	$30,000
After Tax	$150,000	$170,000
Equalization Owing	$75,000	$85,000

While the discrepancy between 25% and the average 20% for firefighters, police, and teachers is smaller, their Family Law Values are larger so that a 5% gap will frequently still produce a loss of $10,000 to the non-member spouse.

While it is the responsibility of the pension holder to provide the tax rate, when a guesstimate of 25% is used without support it may fall to the non-pension holding spouse’s lawyer to obtain an exact projection of the tax rate. While this is unfair, it is likely to be financially rewarding to the non-pension holding spouse. Golden Actuarial provides tax rate estimates upon request.

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