THUNDER BAY, ON ---- February 18, 2010 In 2007, the federal government announced one of the biggest changes to tax law since the introduction of the RRSP. If you or your partner receives qualified pension income, the federal government’s pension income-splitting provisions could mean extra money in your pocket when you file your income tax returns.
In a nutshell, pension income-splitting allows couples to potentially reduce their overall tax bill by shifting income from one partner (the higher income earner) to the other (the lower income earner) who is taxed at a lower rate. This is just an allocation for tax reporting purposes and the actual income does not have to be paid to the partner.
Achieving the optimal split
Pension income-splitting can be an effective tax minimization strategy for many Canadians, but before you dive in, you should talk with your Consultant to get a good understanding of the potential limitations and tax implications to ensure the optimal “split” is made. Both you and your partner must be Canadian residents and living together as a married or common-law couple to be eligible. Up to 50% of qualified pension income can be split.
The type of income which qualifies for pension income-splitting is different if you are under 65 years of age or over, but generally includes pension, annuity, RRIF (including life income fund, locked in retirement income fund and prescribed RRIF income), and RRSP annuity payments.
In terms of potential tax implications, pension income-splitting may have an impact on the following tax calculations:
• Quarterly tax installments – If you split income, you might have your quarterly tax installment payments reduced or eliminated. But, your spouse may now have to start or increase their installment payments.
• OAS and Age Credit clawbacks – By splitting income you may be able to reduce or eliminate these clawbacks. But your spouse may start having them.
• Spousal credit – Could be reduced or eliminated if you pension income split. But, your spouse will be able to claim their own basic personal credit if they have to file a tax return.
• Medical expense credit – By increasing the income of the lower taxed spouse, are you reducing the amount available for this credit? Does it save taxes overall?
• Medical premiums – By increasing the income of the lower taxed spouse, you may be reducing the overall amount your household has to pay for medical premiums.
• Pension income credit – If your spouse doesn’t have pension income, pension income-splitting can be advantageous as it may allow your spouse to claim this $2,000 credit.
The tax advantage of a Spousal RRSP
With the emergence of pension income-splitting, it is important not to forget the potential tax benefits of a Spousal RRSP. In this case, the spouse who anticipates having the higher income in retirement can make and claim the tax deductions for RRSP contributions that will eventually be taxed in the hands of the spouse with the lower retirement income. Spousal RRSPs are useful in many circumstances such as, if you anticipate retiring prior to age 65 (since RRIF income cannot be split until age 65) or if you have a younger spouse and wish to continue making RRSP contribution past age 71.
Pension income-splitting is a complex tax-reduction strategy that can change from year to year based on your situation. The key is to determine what amount would best optimize taxes for both spouses. Your consultant can help determine if pension income-splitting is right for you and then you can contact your tax accountant to determine what the optimal split would be. From
there we can discuss how you can use this “found” money to solidify other aspects of your financial plan.
This is specifically written and published by Investors Group and intended as a general source of information only, and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide legal advice. Clients should discuss their situation with their Investors Group Consultant for advice based on their specific circumstances.
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