Living off your pension is hard enough without the Canadian government taking a percentage of that income in taxes. In fact, for many pensioners, their end-of-the-year tax bill is one of the biggest ticket items or expenditures they need to worry about when planning their finances.
What many pensioners don’t realize is that there is a tax-saving strategy that can help them save thousands of dollars in taxes but is often neglected or overlooked.
Yes, we are talking about pension income splitting. This underutilized tax benefit can be hugely beneficial for seniors over the age of 65, and even more beneficial for those over the age of 71 who can no longer make RRSP contributions.
In fact, we believe that pension income splitting is one of the most effective tax-saving strategies available to retirees and in this article, we will learn why.
What Is Pension Income Splitting?
You won’t find pension income splitting highlighted in an income tax guide, but we are here to tell you that it exists and can provide considerable savings to seniors.
Pension income splitting is a tax planning strategy that allows Canadians over the age of 65 who are married to split up to 50% of their private pension income with their spouse when filing for their income tax returns.
Why is this such a big deal?
Well, take a moment and think about it. Let’s say you and your spouse are over the age of 65 and your private pension income is $97,000. The tax applicable on this pension income would equate to about $17,320.
However, if you were to split this income with your spouse you would each file a return for just $48,500. In this case, your total family tax obligation would equate to approximately $14,550.
By adopting a pension income-splitting tax strategy you would thus end up saving $2,770 in taxes. A sizable chunk of change!
Of course, this is just a basic example to give you an idea of how the strategy works. Whether this strategy would work in your case or not will largely depend on you consulting with a professional tax planning advisor who will review your case to find out just how beneficial this strategy can be for you.
How To File For Pension Income Splitting? Who Is Eligible?
To be eligible for pension income splitting you must be married and be 65 years old or older. Your spouse or common-law partner should also be 65 or older and you both must have lived together in Canada for the entire tax year.
The income that can be split with a pension income splitting strategy includes pensions from a previous employer, income from an RRSP (Registered Retirement Saving Plan), income from an RRIF (Registered Retirement Income Fund), and payments from an annuity.
However, income from government pension sources such as CPP (Canada Pension Plan) or OAS (Old Age Security) payments can not be split.
So, how do you apply for pension income splitting? Well, the process is actually quite simple. All you and your spouse have to do is fill out Form T1032 Joint Election to Split Pension Income and file it with your annual tax return. The form can be downloaded from the CRA Website or by clicking here.
Apart from filling out the details in the form, you will also have to show the deduction of pension income being made that is being allocated to the spouse. This deduction amount will be made on line 21000 on your tax return. The spouse receiving the split income will also add that income on line 11600 of their return.
Essentially, that’s all there is to it. Fill and submit the form and make a slight adjustment on the returns being filed to take advantage of this underutilized tax benefit.
Pension income splitting is also the only tax-saving strategy that can be implemented even after the tax year has ended.
Frequently Asked Questions (FAQs)
Q) Is pension income splitting beneficial for all retired couples?
To get the most out of a pension income splitting strategy one earner needs to earn a lot less than the other. This is because you want to be moving income earned from a higher income earner to a lower income earner to get the biggest tax break.
In cases where both earners have about the same amount of pension income, this strategy wouldn’t be effective.
Q) Is there a need to transfer funds between spouses to avail of this strategy?
No. Pension income splitting doesn’t require the need to transfer funds to your spouse or common-law partner. It also does not require you to make any changes in how you receive your pension income. There is also no need to notify your pension administrator if you want to use this tax benefit.
Q) Is income splitting and income shifting the same?
Yes. Both strategies involve dividing income between the two partners in a way that reduces the overall tax owed.
Consult With An Experienced Financial Advisor Today!
Pension income splitting was first introduced in 2007, so it is a recent addition to Canadian tax law. As such, there are still many pensioners out there who are unaware that such a tax benefit exists for which they could very well be eligible.
This is one of the many reasons why individuals need to seek the assistance of trusted financial consultants who can provide expert financial advice and guidance to help them achieve their financial goals.
If you would like to learn more about retirement planning in Toronto, Mahone Bay, or Halifax give Eastport Financial a call at 902-474-5433.
