Dan White
Several people have asked for some information about income splitting and/or pension splitting. Since pension splitting has more content to work through, I will cover it first.
What is pension splitting, and why should you consider it?
According to tax laws in Canada, an individual who makes $80,000 is subject to a higher rate of taxation than two people who make $40,000 so, if one person is getting a substantially higher pension income than their spouse, it makes sense to look at “splitting” the pension income to reduce the tax rate of the higher earner. If you meet the criteria, you can transfer up to 50% of your pension income to your spouse. This is a paper-only transaction when you report your income at tax time by filling out Form T1032 – Joint Election to Split Pension.
To be eligible you need to receive an eligible pension as listed in the next paragraph, you must be married or in a common-law partnership and not have lived apart more than 90 days due to marriage breakdown, and you and your “spouse” must both live in Canada as of December 31st in the year you claim.
Rules are in place to determine what is allowed, but a brief guide is that any income from a registered company pension plan can be split with your “spouse” when you start drawing from that plan. If you have RRSP’s or a deferred profit sharing plan, they can be converted to income through a life annuity or an RRIF (Registered retirement Income Fund) and that income can be split if you are at least 65 years old.
The government has set guidelines about what income is eligible for pension splitting and you can read more about it on their website at http://www.cra-arc.gc.ca/pensionsplitting/ .
Canada Pension Plan (CPP and Old Age Security (OAS) do not qualify for pension splitting. (CPP has a separate set of rules for pension splitting)
Please talk with your accountant or financial planner to better understand the process.
Dan White is a Meaford-based Life and Health Insurance and Mutual Funds Advisor with Desjardins Financial Security Independent Network. If you have questions about financial issues that you would like Dan to write about, send him an email at: dan.white@dfsin.ca
