There’s a little-known tax savings strategy that we like to talk about every year and that is pension income splitting. It can be easily claimed, though it isn’t well highlighted in the income tax guide and can provide tax savings to seniors.
It’s also one of the only tax planning strategies that can be implemented after the tax year has ended.
Under pension income splitting, Canadians who are 65 or older and married can share up to 50% of their private pension income with their spouse when filing income tax returns. The goal is to lower the overall family tax obligation.
Here’s a simplified example to illustrate …
You and your spouse are over 65. You received $97,000 in private pension income. If you were to claim the full amount on your tax return, you would pay about $17,320 in federal taxes.
If you took advantage of pension income splitting, you and your spouse would each claim 48,500. In this case your family tax obligation would be about $14,550.
Income that is eligible for splitting generally includes pension from
- Previous employer
- RRSP (Registered Retirement Savings Plan)
- RRIF (Registered Retirement Income Fund)
You can not split income from government pension sources such as the Canada Pension Plan (CPP).
To split pension income, you and your spouse both have to submit form T1032 Joint Election to Split Pension Income. You do not actually have to transfer the funds to your spouse. You’re simply splitting the funds on paper.
The original recipient of the pension income must also deduct the amount being split on line 21000 of their return. The spouse sharing the income would then have to claim the same amount on line 11600 of their return. Line 43700 will also be adjusted to reflect the tax paid on each portion of the pension income being shared.
To find out whether pension incomes splitting makes sense for your family, and to calculate the optimum amount to share, contact us today.
