Spring is just around the corner and that means that personal income tax season will also be arriving. For individuals who are retired or over the age of 65, there may be an opportunity to take advantage of a spouse’s lower marginal tax rate and/or available tax credits to provide tax savings through pension income splitting.
An individual may allocate up to 50 percent of their eligible pension income with their spouse (or common-law partner) for tax purposes. Splitting pension income with a spouse does not mean that funds must be transferred to the spouse; it is just an election to shift income from one spouse’s tax return to the other.
The age of the person who receives the pension income determines whether or not the amount is considered eligible pension income. In general, for an individual over the age of 65, eligible pension income includes amounts such as annuity payments from pension plans and deferred profit sharing plans, payments from a Registered Retirement Income Fund (RRIF), Life Income Fund (LIF) or Locked-In Retirement Income Fund (LRIF), certain Registered Retirement Savings Plan (RRSP) payments, and the interest element of annuity contracts.
For individuals who have not yet reached the age of 65, eligible pension income can include amounts such as annuity payments from pension plans and any amounts received as a result of death that would have been considered eligible pension income if the individual was 65 years old.
Amounts that are not considered eligible pension income include Old Age Security (OAS) benefits, Canada or Quebec Pension Plan (CPP/QPP) benefits and amounts withdrawn from an RRSP that are not annuity payments. In order to split RRSP income for tax purposes with your spouse, you must be 65 years of age or older and the RRSP funds must be used to purchase a registered annuity or the RRSP must be converted to an RRIF.
A tax advisor can help to review your situation and best determine whether pension income splitting may be beneficial for your particular circumstances.