Pension Income Splitting
Income splitting allows taxpayers to lower their income and in turn, their tax payable. It means if one spouse earns $60,000 and splits their income with their spouse or common-law partner, they will pay tax on $30,000 each, rather than $60,000. Tax rates increase depending on your income level so the lower the income, the less tax payable. However, the Tax Act only allows income splitting under very specific circumstances. For most taxpayers, this is not an option.
Beginning in 2007, the Federal Government began allowing seniors to split certain pension income. Only certain types of pension income are allowed to be split up to 50 percent of the income between a spouse or common-law partner. Qualifying pension income includes periodic pensions and superannuation payments, foreign pension excluding income from a U.S. Individual Retirement Account and annuities. It does not include lump sum payments, excess amounts from a Registered Retirement Income Fund (RRIF), retirement allowances, death benefits, Old Age Security (OAS) or Canada Pension Plan (CPP) benefits.
To split eligible pension income, both spouses or common-law partners must complete Form T1032, Joint Election to Split Pension Income and attach the form to their income tax returns. Taxpayers who file electronically should maintain a copy of the completed forms in case the Canada Revenue Agency (CRA) asks for them.
Benefits of Pension Income Splitting
The two most obvious benefits of splitting pension income are:
- the transferee will be able to claim the pension income amount on the transferred amount. This is a benefit if the transferee does not already have $2,000 or more of eligible pension income.
- if the transferor is in a higher tax bracket than the transferee, the splitting of pension income has the potential to reduce the family’s overall tax liability by reducing the amount of income that is taxed at the higher rate.
In addition, splitting of pension income has the potential to:
- reduce the amount of the transferor’s OAS clawback as it reduces the transferor’s net income, and
- increase the age amount for the transferor because it reduces the transferor’s net income.
Drawbacks of Pension Income Splitting
Though many older taxpayers can benefit from income splitting, there can be negative effects such as:
- If income is transferred from the lower-income spouse to the higher, the overall tax bill may be increased.
- The transferee’s OAS clawback may be increased by the transfer as their net income is increased.
- The transferee’s age amount may be reduced as their net income is increased.
- If the transferee’s income is low, the transfer may reduce or eliminate the spouse or common-law partner amount.
It is important to review your tax situation before opting to split eligible pension income. The goal is to maximize the benefits and minimize the negative effects.
First-time Homebuyers Tax Credit
First-time homebuyers will now be able to claim a personal amount of $5,000 in respect of the purchase of a qualifying home. The tax savings generated after it has been converted into a non-refundable tax credit will therefore be $750 (calculated as $5,000 x 15%).
A "qualifying home" and a "first-time home buyer" will have the same definitions as for purposes of the RRSP Home Buyers' Plan.
The credit will also be available to taxpayers who are eligible for the disability tax credit if the home is acquired to enable the taxpayer to live in a more accessible dwelling or in an environment better suited to his or her personal needs and care.
If you require childcare to work or attend school, you may be able to claim some money on taxes.
You or your spouse or common-law partner may have paid for someone to care for your child so one of you could earn income, go to school, or conduct research. You can claim the expense if the child was under 16 or had a mental or physical impairment.
The general rule is only the spouse or common-law partner with the lower net income – even if it is zero – can claim the expenses.
Childcare expenses include fees paid for:
- nursery schools
- day-care centres
And with some exceptions, you may also claim expenses for:
- day camps or day sports schools
- boarding schools and overnight sports schools and camps
You need to have receipts from your childcare provider to support your claim. There is a limit to the basic amount that any taxpayer can deduct for child care. This limit is the least of:
- $7,000 for each eligible child who is under seven, plus $4,000 for each eligible child who is either age seven to 16; ($10,000 for each eligible child who qualifies for the disability amount);
- the total amount actually paid for child care in the year; or
- two-thirds of the taxpayer’s earned income for the year.
Children’s Fitness Credit
Get the kids active and claim a tax credit.
Parents can get a little tax credit for their active children. The Children’s Fitness Credit is a non-refundable credit and allows parents to claim a maximum of $500 paid towards an eligible program. The cost covers registration for each child under the age of 16. It does not cover the costs of things such as equipment or travel expenses.
An eligible program is defined by Canada Revenue Agency as “an ongoing, supervised program, suitable for children, in which substantially all of the activities undertaken include a significant amount of physical activity that contribute to the cardio-respiratory endurance, plus one or more of muscular strength, muscular endurance, flexibility and balance.” Or simply, your kid needs to sweat for the activity to qualify.
The program must last at least eight weeks at a minimum of one session per week. For children under the age of 10, the session needs to last at least 30 minutes. For children 10 – 16, the activity must last an hour.
Children with disabilities are eligible for an additional $500 credit up to the age of 18, provided that a minimum of $100 is paid for an eligible fitness program. The additional credit takes into account the extra costs that children with disabilities encounter when they become involved in programs of physical activity such as specialized equipment, transportation and attendant care.
It is important to obtain a tax receipt from the organization that provides the programs. There are sample receipts online in case your organization is unsure what needs to be included.
For residents of Nova Scotia, the provincial government also provides a similar children’s fitness credit.
Claiming medical expenses, on your tax return, may provide a substantial tax savings.
Medical expenses cover a wide range of healthcare related costs such as:
- Pharmaceutical prescriptions
- Eye exams, glasses and/or contact lenses
- Dental and orthodontic work
- Chiropractic costs
- Hearing aids and their replacement batteries
- Massage therapy
- Medical travel insurance
- Medical plan deductibles
The list is extensive so it is worth checking before you throw away receipts that could be valuable.
To claim medical expenses, the total costs must exceed three per cent of your net income and only the portion that exceeds your net income is claimed. Example: if your net income is $30,000, your medical expenses have to exceed $900 ($30,000 x 3%) and you can only claim the expenses over $900.
Taxpayers may claim qualifying medical expenses they paid in the taxation year, or in any period of twelve months ending in the taxation year. Any twelve-month period ending in the year may be selected to determine the most advantageous total for medical expenses. This could mean reporting expenses from June 2008 to May 2009 to give you the largest total to claim.
Even if you have medical or dental insurance that reimburses you for you health costs, you can still the claim the portion of expenses that the insurance plan does not cover. And the premiums you pay for private health insurance, like that which is deducted directly from your paycheque, can also be included as a medical expense.
If you relocate to start a new job or a new position with the same employer, you may be able to deduct some of your moving costs from your taxable income.
In order for moving expenses to be deductible, your new residence must be at least 40 kilometres closer to your new place of employment. However, if your employer pays for some of your moving expenses, you cannot claim those expenses.
Moving expenses are deductible only from a taxpayer’s net earnings at the new location. So if you move later in the year, and only earn a few weeks of income at your new job then you may find your deductions are limited. However, eligible moving expenses that cannot be deducted in the year of the move may be carried forward and claimed against net earnings from the new location in a subsequent year.
Deductible Moving Expenses
Moving expenses are one of the most reviewed and re-assessed tax deductions so it is important to understand if you qualify and what you can actually claim.
Deductible moving expenses are those listed in the Income Tax Act, and are limited to the following:
- the cost of moving household effects, including packing, hauling, in-transit storage, and insurance costs;
- transportation costs to the new residence for the taxpayer and his or her family including amounts for travel, meals, and lodging en route;
- the cost of temporary lodging and meals for up to 15 days near the former residence and/or the new residence;
- the cost of canceling a lease for the old residence, not including any rent paid while the taxpayer lived there;
- the cost of changing addresses on legal documents, replacing automobile permits and licenses, and utility hook-ups and disconnections;
- up to $5,000 of the amount incurred for interest, property taxes, insurance premiums, heating and utilities required to maintain the former residence after the move, provided it was not being rented or lived in by a household member and reasonable efforts were made to sell it;
- selling costs of the old residence, including real estate commissions, legal or notarial fees, advertising, and mortgage penalty if a mortgage is paid off before maturity; and
- legal fees connected with buying a new home and any taxes paid to register or transfer title to the new residence, but only if the taxpayer or his or her spouse sold the old residence as a result of the move. This deduction is not available to taxpayers acquiring a first residence. “Taxes paid to register or transfer title” do not include the GST/ HST payable on newly built residences.
Non-Deductible Moving Expenses
The items listed below are not deductible as moving expenses:
- pre-move expenses from the old location to the new location for job-hunting, house-hunting, or any other purpose;
- expenses incurred to make the former residence more saleable; and
- any loss on the sale of the old residence.
Transit Pass Credit
Travelling by public transit has its tax advantages.
You can claim the cost of monthly transit passes or passes of longer duration for public transportation, which includes local bus service, streetcar, subway, commuter train, commuter bus and local ferry.
The cost of passes for shorter duration may also be claimed if each pass allows you unlimited travel for at least five consecutive days and you purchase four consecutive weeks.
This credit can be claimed by either parent. To get the maximum benefit, combine the cost incurred for you, your spouse or common-law partner and dependent children under the age of 19.
Remember to keep your receipts and passes to support your claim.