| Managing Your Money Pension income splitting could mean tax savings There's a federal tax provision that seniors should know about because it could mean tax savings. If you are eligible, you can 'split' up to 50% of eligible pension income with a spouse or common-law partner for tax purposes in order to create overall tax savings for you and your partner. It's called pension income splitting and here's an example of how it works:
- A Manitoba couple who are both over age 65 share $15,000 of Canada Pension Plan (CPP) benefits. Each receives the maximum Old Age Security (OAS) benefit and one spouse has an annual registered pension of $50,000. The registered pension recipient allocates $25,000 of their pension income to the other spouse creating a family tax savings through pension income splitting of $2,638.
- To be eligible for pension income splitting, the income must qualify for the federal pension income credit.
- For those age 65 and over, income eligible for the Pension Income Tax Credit includes periodic payments from a pension plan (Canadian or foreign), investments held in a Registered Retirement Income Fund (RRIF) or Life Income Fund (LIF) payments, annuity payments under a Registered Retirement Savings Plan (RRSP) or Deferred Profit Sharing Plan (DPSP), and the interest portion of payments under a non-registered annuity.
- For those who have not reached age 65, eligible income for this credit includes periodic payments from a (Canadian of foreign) pension plan, RRSP/RRIF and annuity payments made to a spouse as a consequence of the death of the owner of the account.
- OAS, CPP/QPP (Quebec Pension Plan)payments and Guaranteed Income Security (GIS) payments do not qualify.
- Splitting pension income can result in a reduction in the OAS claw back for the higher-earning spouse. The 2014 OAS claw back applies to net income between $71,592 and $116,103.
- There is no actual payment of pension income from one spouse to another - the allocation is simply shown on the tax form.
- The allocation can be changed each year.
- The allocation can affect income-tested credits such as the age credit, the spousal credit and the medical expense credit.
- A couple who has not used income splitting in a prior year can apply for pension income splitting for the previous three years.
- Spouses are jointly responsible for total taxes owing.
Be sure to take full advantage of pension income splitting and all other tax-reduction strategies by talking to your professional advisor today. This column, written and published by Investors Group Financial Services Inc. (in Québec - a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant. Wayne Burke at 709-597-1562 or email [email protected] |
