A Tax-Saving Strategy for Seniors

If you earn income eligible for the Pension Income Tax Credit, you or your spouse or common-law partner may cut your total tax bill by using an income splitting strategy.

Tax Planning Points Increasing your spouse’s income above a certain level or reducing your income below a certain level will result in a claw-back of OAS. Increasing your spouse’s income to more than a certain government set level will trim the old age amount tax credit. Talk to your financial advisor If your spouse is under 65, income from RRIFs, RRSP annuities, and other annuities do not qualify for the pension amount tax credit, while payments from pension plans do. Under pension splitting guidelines, you may transfer as much as 50 per cent of the qualifying income to the tax return of a lower-income spouse or common-law partner. This allows a greater portion of family income to be taxed at a lower rate and generates a higher level of after-tax income.

Pension splitting sidesteps attribution rules, where transferred assets are generally attributed back to, and taxed in the hands of, the person making the transfer.

Who Is Eligible

Ottawa allows spouses or common-law partners to shift as much as 50 per cent of eligible pension income to the other as long as they:

• Are married or in a common-law relationship in the year they choose to split the income;
• Reside in Canada on December 31 or at the time of death; or
• In the case of bankruptcy, reside in Canada on December 31 of the calendar year in which the tax year (pre- or post-bankruptcy) ends.

In addition, they cannot be living apart at the end of the year and cannot have been living separately for more than 90 days during the year because their relationship broke down. You may split income if you are living apart for medical, educational or business reasons.

The Effects of Pension Income Splitting

1. Spouses or partners who qualify for the pension income tax credit may claim the first $2,000 of qualifying income. Tax withheld from the pension, remitted to Canada Revenue Agency (CRA), and reported on the T4A slip, is also transferred to your spouse, in proportion to the amount of pension you transfer.

2. If the transferred income is taxable income from pension plans and superannuation plans, your spouse will be able to claim the pension income amount. If the income is the taxable portion of annuities, RRSP annuities and RRIF payments, your spouse must be older than 65 to claim the pension income amount of $2,000.

3. Pension income splitting will not affect tax credits such as the child tax benefit, the GST/HST credit, Canada Child Tax Benefit and related provincial or territorial benefits. However, the new tax benefit may affect individual tax credits, such as the age amount credit and the OAS claw-back.

4. If your spouse or partner is in a lower tax bracket than you, transferring pension income to your spouse will result in a lower combined tax bill, and may also result in a lower OAS claw-back. For low income seniors, it may boost your tax credit due to the age amount.

What Is Eligible

If you are age 65 years or older, the income that qualifies is the same as the income that is eligible for the Pension Income Tax Credit, which is available on as much as $2,000 of certain forms of pension income. This includes the total of:

1. Income from a Registered Pension Plan (RPP);

2. Annuities from a Registered Retirement Savings Plan (RRSP);

3. Payments from a Registered Retirement Income Fund (RRIF); and

4. The taxable portion of annuities from a superannuation or pension fund or plan.

For individuals under the age of 65, qualifying income comprises money from pension plans and superannuation plans, including foreign pensions.

Payments from RRSPs do not qualify, so if you are older than 65 and plan to withdraw money from your plan, talk to your tax accountant about the possibility of converting the RRSP to either an RRIF or an RRSP annuity. (There is no age restriction for the spouse or common -law partner who receives the income allocation.)

Other income that does not qualify includes payments from the Canada or Quebec Pension Plan, Old Age Security (OAS) payments, and Guaranteed Income Supplements (GIS).

The allocated pension income is treated as income of the lower-income spouse for all purposes under federal income tax rules. In effect, some couples may now receive a second pension tax credit where previously only one was available. In addition, splitting pension income could mean higher Old Age Security entitlements for some couples.

For those individuals eligible to split their pension with their spouse or partner, the degree of benefit will likely vary noticeably, so talk to your tax accountant to ensure that you are making the right decision and that you take the maximum benefits allowable.