Tax Time around the Corner

By: Caroline Nalbatoglu

Although it’s been around for a year, the federal government’s provision for pension splitting may be new to you if you started to receive employer pension, annuity, or RRIF income in 2008. Since 2007, any Canadian resident who receives income that qualifies for the pension income tax credit is allowed to allocate up to 50% of that income to his or her spouse or common law partner, as long as the spouse or partner is a resident of Canada.

What income qualifies for this credit? That depends on the age of the original recipient of the payments. If you’re under 65, only income from a registered employer pension plan is eligible, unless you’re receiving income from a registered pension plan or a prescribed annuity as the result of the death of a former spouse. If you’re 65 or older, RRIF, LIF and annuity income qualifies, in addition to em-ployer registered pension plan payments. The age of the spouse to whom you’re allocating the income doesn’t matter.

How much benefit you get from pension splitting will depend on the difference in marginal tax rates between you and your partner. For example, if you were in a 45% tax bracket and your partner’s marginal rate was 25%, you would save 20% of every dollar transferred.

And it’s easy to do. There’s no need to have the actual income paid out any differently – it’s just a matter of reporting it differently on your tax return. Both spouses must complete Form T1032, Joint Election to Split Pension Income, and attach a copy to their tax returns. The tax withheld at source on the eligible pension income must also be split in the same proportion as the pension income itself is allocated.

An additional bonus could come in the form of the pension income tax credit, a $2,000 federal amount1 that, under some circum-stances, can be claimed by both spouses when pension income is split.

Pension income splitting can provide some significant benefits when you file your return, and it may also affect the calculation of your installment payments for the coming year. Be aware, though, that a 50% split isn’t always optimal. You need to consider the impact of other factors such as the clawback of OAS benefits, and, in Ontario, the calculation of the health premium. Your PWL advisor can help you determine how best to take advantage of pension splitting.

1 Provincial credit amounts may be different.