Segregation would give member one $4000 income and the other member $3000 and they would have different balances at the end of the year ($104,000 vs $103,000)
Segregation does not do this. To get this result you need to allocate assets to members, which you can do in any fund with or without segregation because "segregation v proportionate" deals with how the fund determines ECPI. If there are no pension members, there can be no segregation.
You need to view income and tax as a 2-step process.
1. determine the income and allocate it to each member's interests according to equitable principles
2. if there are retirement phase income streams, determine the tax to be paid according the rules for ECPI ( where segregation kicks in )
A fund can be segregated for part of the year and proportionate for the rest of the year - see details on Accurium and Heffron web sites.
My question is, if the assets are not segregated does each member's balance increase by $3500?
If assets are allocated to each member, then the income arising from those assets would also be allocated to each member. This is about members documenting their decision to allocate, e.g. investment strategy, then ensuring that the financial statements reflected that decision. If assets are not allocated to members, then income is allocated in proportion to member balances.
Think about it this way - if there were no pensions then there could be no segregation => by definition. You still have the issue of you you are going to allocate income to members.