Even in this difficult economy, there is good news for retirees – you can realize significant potential tax savings by splitting eligible pension income with your spouse.
“Income splitting is a way for families to reduce their total tax liability by shifting income to the lower income earner from the higher earner,” explains Chartered Accountant Sunita Arora, Partner, Lipton Wiseman Altbaum & Partners LLP in Toronto. “A pensioner can transfer up to 50 per cent of eligible pension income to his/her resident spouse or common-law partner.”
However, there are some specific eligibility rules, according to Arora. “Income from a registered pension plan can be split, regardless of the recipient’s age. Income from a RRSP (Registered Retirement Savings Plan) annuity, RRIF (Registered Retirement Income Fund) or deferred profit-sharing plan annuity is also eligible if the recipient is 65 years of age or older.”
The RRIF and RRSP annuity payments are eligible for splitting before the age of 65 if they are received due to the death of a spouse.
Pension splitting is an important part of the retirement-planning process. It lowers the taxable income of the spouse with the higher marginal tax rate and raises the taxable income for the lower-income spouse – a transfer that produces a combined tax saving.
“Just be careful in determining the amount of pension to be split. If too much income is transferred to the lower-earning spouse, it could trigger a clawback of some Old Age Security (OAS) benefits and also affect the couple’s ability to claim certain personal tax credits,” advises Arora.
Brought to you by the Institute of Chartered Accountants of Ontario.
The Institute of Chartered Accountants of Ontario is the qualifying and regulatory body of Ontario’s 33,000 Chartered Accountants and 5,000 CA students. Since 1879, the Institute has protected the public interest through the CA profession’s high standards of qualification and the enforcement of its rules of professional conduct. The Institute works in partnership with the other provincial Institutes of Chartered Accountants and the Canadian Institute of Chartered Accountants to provide national standards and programs that are used as examples around the world. </em>
