Yes, you can still split your pension income. The income splitting credit that the new Federal Government vowed to abolish in their 2015 election campaign was the Family Tax Cut. The opportunity for pensioners to split their qualified pension income with their spouses is still alive and well.
When filing your income tax return, you can jointly elect to shift up to 1/2 of eligible income from the spouse in the higher income tax bracket to the spouse in the lower income tax bracket. Tax savings result from the difference in tax brackets, and may result in the lower-income spouse’s ability to claim the Pension Income Tax Credit.
What is a couple?
The definition as it relates to pension income splitting is: two individuals who are married or in a common-law partnership, and are Canadian residents on December 31.
A breakdown in that relationship is defined as one where the couple is living “separate and apart” from each other at the end of the year and for a period of 90 days or more at the beginning of the year.
If the couple is living apart for medical, educational, or business reasons, they are still considered a couple.
Qualified Pension Income: Age 65 and better
If you are age 65 or better at the end of the tax year, qualified pension income includes:
- Registered Pension Plan (RPP) Payments;
- Registered Retirement Income Fund (RRIF) Payments;
- Life Income Fund (LIF) Payments;
- Locked-in Retirement Income Fund (LRIF) Payments;
- Lifetime annuities from registered plans, i.e. registered annuities;
- The interest portion of non-registered annuities, both prescribed and non-prescribed
Qualified Pension Income: Below Age 65
If you are below age 65, qualified pension income includes:
- Registered Pension Plan (RPP) Payments
And any of the items off of the “Age 65 or better” list if you receive it as the consequence of the death of a spouse.
Canada Pension Plan and Old Age Security payments are not eligible for pension income splitting.
You can apply to split your Canada Pension Plan income directly with Services Canada when you apply for the pension. The split will be based on the the length of your relationship during your contributory period.
Executing the Strategy
The spouse whose income is to be split completes and files the election (CRA Form T1032) with their income tax return. This must be signed by both spouses in order to acknowledge the split.
You must make this election every year. One form once doesn’t do – you’ll need to keep filing it with your income taxes as long as you want to split your pension income.
The result is that, as a couple, income taxes are lower. However, one spouse ends up paying an increased amount in income taxes without actually receiving any of the pension income.
For more information on how you can implement the Pension Income Splitting strategy, speak to your accountant or drop us an email.