Pension Income Splitting

For a substantially increasing number of Canadians, the day of retirement is fast approaching. After all the years of saving for retirement, you want to make sure as much as possible of your hard earned pension and other retirement assets ends up in your hands and not the government’s.

So although you’re ready to hang up your hat, the work is not quite done. Proactive retirement and pension splitting planning can go a long way in reducing your tax bill in your retirement years. In the past, most couples tried hard to make sure that they ended up with retirement assets as close to equal as possible so that one or the other wasn’t in a higher tax bracket. As a result of the 2007 federal budget however, Canadian residents have a much easier time of balancing things out. This is a very welcome and valuable change to our tax laws and one that needs to be fully understood.

The general idea behind pension income splitting is that you can split the income you have coming in from your RRIFs, LIRAs, company pensions and other sources between you and your spouse so that your total taxable income at the end of the year is close to even. By doing this, you can help ensure that one of you isn’t reporting and being taxed on most or all of the income coming in and by doing so, being pushed into a higher tax bracket. If you’re in the position of having some or all of your OAS being “clawed-back”, pension splitting may be an excellent tool to move you under that threshold (although the spouse being allocated this extra income may be pushed up to OAS claw-back themselves).

So who qualifies for pension income splitting? Spouses (or common law partners) must be residents of Canada and must be living together in that year. The spouse that is splitting the income must also be at least 65 years of age by the end of that calendar year.

What income qualifies to be split? A wide variety of retirement sources qualify for income splitting. Among these are annuity payments, pension income, LIF, LI-RIF and RRIF payment amounts. A full list of qualifying income sources can be found on the CRA website. Certain types of income are NOT available to be split including CPP, OAS, GIS payments as well as income from a retirement compensation arrangement.

When formulating your retirement plan and deciding on a strategy for accessing your retirement savings, it’s important to consider the above qualification and exclusion rules to make sure your plan will work. For many, the income splitting rules may dictate that you want to convert your RRSP assets over to a RRIF earlier than planned to benefit from these opportunities.

So with the pension income splitting rules here to (hopefully) stay, are spousal RRSPs still relevant?

Absolutely! Not including the risk of further changes in the other direction, continuing to use spousal RRSPs also facilitates income splitting prior to age 65, doubles access to programs like the Home Buyer’s Plan and provides the opportunity to allocate more than 50% of your retirement income to your partner if need be. For the time being at least, we are continuing to use the spousal RRSP program moving forward.

Charting a smooth path into your retirement and beyond is a complex process and one that should not be taken lightly. The pension income splitting rules are a great opportunity to ensure your hard earned money is there for you to enjoy it. Ask questions and get informed to make sure your plan works best for you.

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