You and your spouse are enjoying your golden years together and share pretty much everything. The CRA (Canada Revenue Agency) recognizes that sharing is caring, so they allow senior couples to split pension income. This can offer you big savings on your tax bill, since you can transfer up to 50 per cent of your qualifying pension income to your spouse or common-law partner.
How do I know if we qualify for pension income splitting?
- You and your spouse or common-law partner must both be residents of Canada on December 31 of the tax year being filed.
- In the case of a senior who passed away during the year, they must have been a resident of Canada immediately before death.
- You need to be married or in a common-law partnership.
- You cannot be separated for a period of 90 days or more that includes the end of the year.
What kind of pension income is eligible?
- Income from a registered pension plan will qualify regardless of your age: The CRA website has specific criteria on what’s considered eligible, but it’s good to know that any income that qualifies for the pension income tax credit can also be considered eligible income for tax splitting. This means that transferring income to your spouse could allow them to claim up to $2,000 through the pension income credit, on top of tax savings you’ll receive through splitting income.
- Registered Retirement Income Fund (RRIF) withdrawals, registered annuities and interest from non-registered annuities: These will qualify if you’re 65 and over.
What kind of income isn’t eligible?
- Old age security and CPP benefits don’t qualify as eligible pension income.
- Investment income doesn’t qualify, but converting an investment to a Guaranteed Investment Annuity from a life insurance company would make it eligible for the pension income tax credit. Make sure to check in with your financial planner before transferring investments.
Who should split with whom?
If you and your spouse have eligible income, you need to decide who will be the one allocating income and who will receive the income. Splitting income allows money to be moved from one spouse’s higher tax bracket into another’s lower one to help reduce the overall tax bill, so as a general rule, the person who earns more should allocate their pension income to the lower income earner. If one spouse or common-law partner does not have any qualifying pension income, it may also be beneficial to transfer at least $2,000 so they can benefit from the pension income amount.
Is splitting pension income always beneficial?
If you’re the spouse with income in the higher tax bracket, you’ll definitely benefit most from transferring income to your partner in a lower tax bracket, especially if you’re subject to Old Age Security clawbacks. Though your tax bill might be reduced, changing your partner’s taxable income can create other adjustments to watch for. Let’s say your partner is in a nursing home: their housing fees might increase if they happen to be calculated based on their income, so bear that in mind when considering pension income splitting as an option.
Can I meet the deadline?
Pension income splitting requests must be made within three years of the filing deadline for the tax year in question, so the deadline for the 2017 tax year is April 30, 2021. If you’ve already filed your return and are now thinking about income splitting as an option, remember that it could change any already assigned benefits, credits and refunds that you might have received. Pension splitting could still be worthwhile in the end, but make sure you check into it in advance to avoid any surprises.
Not everyone is eligible for pension income splitting, but if you are, take advantage of this option and save some money on this year’s return.