Pension Income Splitting can Create Savings Opportunities

Pension income splitting is a tax savings strategy designed to lower a couple’s overall family income tax bill. The intent is to provide a couple with more disposable income.

When a couple files their annual income tax returns, they can jointly elect to shift up to 50% of the eligible pension income from the spouse in a higher tax bracket to the spouse in a lower tax bracket. Income tax savings are created from the difference in a couple’s tax brackets multiplied by the amount of income shifted. Often the splitting of pension income enables the lower income spouse to claim the Pension Income Tax Credit.

To qualify for pension income splitting, a couple is defined as two individuals who are married or in a common law relationship. Relationship breakdowns will prevent the couple from using this strategy assuming one of the couple is living separate and apart from each other at the end of the year period of 90 days or more. Couples living apart at the end of year because of medical, business or educational reasons would not be disqualified. The couple must be residents of Canada on December 31st.

The definition of eligible pension income depends on the age of the individual spouse receiving the income.

Those Canadians, age 65 or older by December 31st of the year, eligible pension income consists of:

  1. Payments from a Registered Pension Plan (RPP)
  2. Payments from a Registered Retirement Income Fund(RRIF)
  3. Payments from a Life Income Fund (LIF)
  4. Payments from a Locked in Retirement Income Fund (LRIF)
  5. Lifetime Annuities from registered funds
  6. Interest portion of non registered annuities and prescribed annuities

GIC Interest Income from a GIC issued by a Canadian life insurance company for those over age 65 qualifies for the Pension Income Tax Credit. This is not the case with GIC’s issued by a bank, trust company or credit union.

Pension Income splitting is a great tax planning opportunity for Canadians. The ability to lower couples combined income tax liability thus resulting in more after tax disposable income.  For more information on this and other tax and estate planning information make a plan to meet with your financial advisor.