Pension Income Splitting is a tax planning tool that can be used by taxpayers over the age of 65 (and in some cases 60) to reduce their tax liability and increase their eligibility for government benefits.
This is done by “splitting” their pension income with their spouse or common-law partner.
This can be one of the most effective tax planning tools for seniors but, unlike the Age Credit and Pension Income Credit, is underutilized as many seniors are unaware of this tax saving opportunity.
Since Canada has a progressive tax system where the rate of tax charged increases as income rises, there are advantages to be found when you can lower your taxable income. This can be done through RRSP contributions and other tax deductions, including but not limited to employment and moving expenses.
Similarly, Pension Income Splitting can be used to reduce your taxable income by splitting up to 50% of your pension income, received from an employment pension (such as an RPP), Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), with your spouse.
When done correctly, this should result in a greater portion of your income being taxed at a lower tax rate.
The Canada Pension Plan (CPP) and Old Age Security (OAS) are government source pensions and cannot be split with your spouse.
Splitting your pension income couldn’t be easier. It requires no advance planning or physical transfer of funds to your spouse, you do not need to contact your pension administrator, and, unlike many credits and deductions, does not require an expenditure of taxpayer money. You don’t even have to consider it until you file your tax return.
If you want to take advantage of this tax planning strategy, all you and your spouse need to do is file a T1032 Joint Election to Split Pension Income Form with each of your tax returns.
On the form, both you and your spouse will elect to split income. Since the splitting of income will affect both taxpayers, the form must be submitted by both spouses. If only one spouse makes the election and submits the form, the income splitting will not be processed.
In addition to submitting a T1032 the spouse who is splitting their pension must deduct, from their income, the portion that they are splitting with their spouse on Line 210. In turn, the spouse who the income is being split with, must add the amount being allocated to their income for the year on Line 116.
Whether or not this tax planning tool will be advantageous to you and your spouse will depend greatly on your unique position. To find out if Pension Income Splitting is right for you and to discuss other tax saving opportunities, please contact us today.