Pension Splitting and You
It is believed that the mass population of Canada regards taxes more as a chore or a “cash grab,” when in actuality taxes paid every year are vital to Canada’s infrastructure and public services. Finding that you are faced with a hefty tax bill can put strain on your finances, or even your well-being, especially when you are not prepared for it. That is why many married and common-law couples choose to alleviate that tax burden through a practice called Pension Splitting.
What is Pension Splitting? Pension Splitting is an electable action you can opt-in on every year when you file your taxes. By splitting your Pension with a spouse, the higher Pension taxpayer can reduce their net taxable income. The benefits of this can include reducing the taxpayer’s marginal tax rate, and possibly increasing the spouse’s marginal rate. Splitting your Pension with a spouse could also reduce or eliminate Old Age Security claw-backs (in other words, having to pay back some of the Old Age Security to the CRA). Also, with Pension Splitting it is possible to create a pension tax credit for the spouse with the lower income.
In essence, the spouse or common-law partner that has a larger Pension will shift some of that Pension to the lower income spouse, which will shift the amount of taxes owed and will decrease the amount overall.
If you are younger than 60 years, only certain life annuity payments, and the amounts received from the death of a spouse (such as RRPS and RRIF) are eligible for pension spitting. If you are 60 years or older, you may split Pension from your RRSP, RRIF, life annuity, and other qualifying payments.
You might save tax by sharing your CPP retirement pension with your spouse if the two of you are both at least 65 years and older, or one or both are receiving CPP retirement and were living together during the time one or both of you were contributing to CPP. You can apply to receive equal shares of the CPP retirement pensions that you both earned during the years living together. This could be beneficial if one spouse is in a higher tax bracket, but claw-back of Old Age Security, spousal tax credit, and senior’s tax credits must be considered.
As stated before, Pension splitting is an electable action that you opt-in on every year when you file your taxes. Both you and your spouse/common-law partner would have to complete and file the CRA’s form T1032, Joint Election to Split Pension Income. It is not the most comprehensive of forms, so getting in contact with your local tax preparer to assist with filling out the form is a good action to take.