Pay less tax as a retired couple by splitting your pension income

December 15, 2014

Discover how as a retired couple you can save money on your return by using a simple tax strategy called pension income splitting.

Pay less tax as a retired couple by splitting your pension income

Pension income splitting is a great tool that allows seniors to take advantage of their spouse’s or common law partner’s lower tax bracket.

With pension income splitting, you can transfer up to 50 per cent of eligible pension income to a spouse or common law partner.

The form

Both you and your partner need to file Canada Revenue Agency Form T1032 (called “Joint Election to Split Pension Income”) with your tax return each year to reap the potential tax benefits.

How it works

The amount transferred will be deducted from the income of the spouse who actually received the eligible pension income and added to the income of the other (presumably lower-income) spouse.

  • Sounds complicated, but this strategy allows the spouse with the higher pension income to drop down to a lower tax bracket without bumping up their spouse up into a high tax bracket.
  • Ideally, the net result will be that combined you both will pay less taxes.

To qualify

To qualify for pension income splitting you must meet all of the following conditions:

  • Be married or in a common-law partnership with each other in the tax year.
  • Live in the same residence as your spouse. You cannot live in separate residences at the end of the tax year or have lived separately in the same calendar year for 90 days or more, unless it is for medical, educational or business reasons.
  • Both be residents of Canada on December 31 of the tax year.
  • If one of you dies, you must be a resident in Canada on the date of death.
  • If one of you goes bankrupt, you must be a resident in Canada on December 31 of the year in which the tax year (pre- or post-bankruptcy) ends.
  • Have received pension income in the year that qualifies for the pension income amount.

Other income funds

The ability to split a Registered Retirement Income Fund (RRIF) for tax purposes depends on the age of the spouse who wishes to transfer their higher-income pension.

Age: 65 or over

  • If the transferor is 65 or over (regardless of the age of the spouse receiving the pension), and both spouses are Canadian residents, then you are allowed to split RRIF income.

You can also split your pension income if you are 65 or over and receive payments from a registered pension plan, life income fund (LIF), locked-in retirement income fund (LRIF), or lifetime annuity in a registered plan.

  • The income portion of certain annuities in a non-registered account may also qualify.

Age: Under 65 

However, if you are under 65, only payments from a registered pension plan will qualify for pension income splitting. RRIF, LIF, LRIF or annuity income will only qualify if received as a result of the death of a spouse.

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