Once the tax year comes to a close, there are very few steps that can be taken to further reduce income and tax liability. There are, however, some last minute tax-planning strategies that can be very beneficial. The first, which we speak of often, is contributions made to an RRSP (registered retirement savings plan). The other is Pension Income Splitting.
Pension Incomes Splitting is a tax planning tool that was implemented for taxpayers over the age of 65 (and in some cases 60). When implemented correctly, as part of your tax planning strategy, Pension Income Splitting can reduce your tax liability and increase your eligibility for government benefits.
Unfortunately, however, many Canadians who are eligible for Pension Income Splitting do not take advantage of this opportunity and, in some cases, have never even heard of it.
How Does Pension Income Splitting Work?
Canada’s tax system is a progressive tax system, which means that the rate of tax charged, increases as income rises.
That is why Pension Income Splitting is so advantageous for Canadians. By splitting income with your spouse, a greater portion of that income will be taxed at a lower rate.
Under Pension Income Splitting, taxpayers who receive private pension income, such as pension from a former employer or payments from an RRSP or RRIF (registered retirement income fund), are allowed to apportion up to 50% of that income to their spouse.
How Do I Split my Pension Income with My Spouse?
Splitting your pension income couldn’t be easier. It requires no advance planning or physical transfer of funds to your spouse. You don’t even have to consider it until you file your tax return.
If want to take advantage of this tax planning strategy, you and your spouse simply need to file the T1032(E) Joint Election to Split Pension Income Form with your annual return.
On the form, both you and your spouse will elect to split income. Because 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(E) the spouse who is splitting their pension must deduct from their income, the portion that they are splitting with there spouse. In turn, the spouse who the income is being split with, must add the amount being allocated to their income for the year.
For more information on Pension Income Splitting, contact us today. We look forward to helping you reduce your tax liability.
