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Income splitting can help seniors save tax

(Special) — Since it was introduced more than a decade ago, Canadian seniors and retirees have been incorporating pension income splitting into their financial and retirement plans, helping them and their families save thousands of dollars in taxes.

Income splitting rules were originally introduced in the 2006 Tax Fairness plan and took effect in the 2007 tax year. They allow any Canadian resident who receives income that qualifies for the pension income tax credit to allocate up to 50 per cent of that eligible pension income to their resident spouse or common law partner.

Income splitting provides the most benefit to families in which there is a large difference in income levels among its partners by shifting income from a higher-income earner to one or more lower-income earners so the total family income tax bill is reduced.

For people 65 and over, eligible pension income includes payments from a registered pension plan (RPP), a registered retirement income fund (RRIF) or a locked-in RRIF, or a lifetime annuity from a registered retirement savings plan (RRSP) or a deferred profit-sharing plan.

For people under 65, eligible pension income generally only includes payments from an RPP since the other payments listed above will qualify only if the payment resulted from the death of a spouse or common-law partner.

Pension payments from programs such as the Canada Pension Plan (CPP) and Old Age Security (OAS) are not eligible for pension splitting regardless of age. Care needs to be taken when determining the amount of pension to be split because it could impact either spouse’s eligibility to collect Old Age Security (OAS).

Todd Sigurdson, director of tax and estate planning with IG Wealth Management, supplied the following example of the tax savings that could be achieved through a spousal RRSP for a couple looking to split income prior to age 65.

The couple lives in Ontario and both spouses are 50 years of age in 2019. One spouse is earning $250,000 as salary income and the other spouse is a stay-at-home-spouse with no employment income.

The working spouse is in a 53.53-per-cent tax bracket. If the working spouse contributes the 2019 RRSP maximum of $26,500 to a spousal RRSP they would receive tax savings of $14,185 from the tax deduction on their 2019 tax return. If no further contributions are made to the spousal RRSP the funds could be withdrawn in 2022 and taxed in the stay-at-home spouse’s hands, generating tax of approximately $2,968 (using 2019 tax rates) resulting in a net tax savings of $11,217.

When using this strategy you need to be careful about the attribution rules for spousal RRSPs, Sigurdson notes.

When an amount is withdrawn from a spousal RRSP the amount that must be included in the contributor spouse’s income for the year of withdrawal is the lesser of (a) the amounts withdrawn from a spousal RRSP or (b), the amounts contributed by the contributor spouse to any spousal RRSP in the year of withdrawal (includes a contribution made in the same calendar year after the withdrawal is made) and spousal RRSP contributions made in the two immediately preceding calendar years.

“With respect to attribution, it is the calendar year in which the contribution was made that is important, not the taxation year for which the deduction was claimed,” Sigurdson says. “This means that the annuitant spouse must wait at least three taxation years after the last contribution to a spousal RRSP before a withdrawal could be made without affecting the taxable income of the contributor spouse.”


Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Copyright 2019 Talbot Boggs

Talbot Boggs , The Canadian Press

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