Here is something to consider when reviewing or preparing your personal income tax returns. Taxpayers are able to split up to 50% of qualifying pension income with their spouse or common law partner. There is no age restriction for the partner who will be reporting their share of the split pension. However, in order to develop a tax efficient strategy, you may have to consider some interesting new outcomes and potential pitfalls and traps.
According to the Canada Revenue Agency, the following should be considered when evaluating pension splitting opportunities:
- Qualifying pension recipients must be resident in Canada
- Pension income must be split with spouses ( or common law-partners ) who are also resident in Canada
- Amounts to be split will be deducted from the income of the recipient and added to the income of the spouse to who the amount is allocated
- Both persons must agree to the allocation
- The splitting of pension income may not only reduce current income taxes but may also decrease the OAS claw-back and increase access to other means-tested refundable and non-refundable income tax credits
- Pension income allocated will qualify for the pension income amount on the tax return of the recipient of the allocation – this pension income tax credit will amount to up to $2,000 for each person
- The income tax that is withheld at source from the eligible pension income will have to be allocated between the persons in the same proportion as the pension income is allocated
For individuals aged 65 years and over, eligible pension income includes:
- Pension benefits from a registered pension plan (RPP) or other superannuation plan
- Annuity income from a registered retirement savings plan (RRSP)
- Payments under a registered retirement income fund (RRIF)
For individuals under 65 year of age, eligible pension income only includes benefits from a registered pension plan (RPP), superannuation plan or any amount described above received as the result of the death of a spouse.
Ineligible amounts include benefits from public pension plans like OAS and CPP and certain Retirement Compensation Arrangements (RCA’s).
The pensioner and spouse or common-law partner have to make a joint election (Form T1032) with their income tax returns for the year on or before their filing due date (either April 30 or June 15).
There are a variety of planning matters to be considered in order to ensure tax efficiency and include the following:
- Should CPP benefits be split between spouses
- Who should draw income from RRSP’s and RRIF’s first
- How should interest and dividends be allocated between spouses
- Can tax installment payments be altered or reduced
- Can OAS claw-backs be reduced or eliminated
- How will pension splitting affect the reduction of age and spousal tax credits
- Who should claim medical expenses
- Who should claim charitable donations
- Who should claim political contributions
- How will pension splitting affect small business owner compensation
As you can see pension income splitting opportunities require some careful planning. Let us help.