Split Pension Income to Save TaxesEven in a difficult economy, retirees may be able to save on their taxes by splitting eligible pension income with their spouses.
“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 Don Knechtel, Partner, Taxation, at Durward Jones Barkwell & Company LLP in Grimsby. “A pensioner can transfer up to 50 per cent of eligible pension income to his or her resident spouse or common-law partner.”
However, there are some specific eligibility rules. “Income from a registered pension plan can be split, regardless of the recipient’s age. Income from a Registered Retirement Savings Plan (RRSP) annuity, Registered Retirement Income Fund (RRIF) or deferred profit-sharing plan annuity is also eligible if the recipient is 65 years of age or older,” Knechtel continues.
The RRIF and RRSP annuity payments are also 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 Knechtel.
Brought to you by the Institute of Chartered Accountants of Ontario
Understanding Your Pension Options
Additional Sources of Retirement Income