When you and your spouse are enjoying your retirement years together, sharing becomes a caring way to manage your taxes. The Canada Revenue Agency (CRA) allows senior couples to split pension income, offering potential tax savings. By transferring up to 50% of your qualifying pension income to your spouse or common-law partner, you can take advantage of lower tax brackets and potentially reduce your overall tax bill. It’s important to note that not all types of income qualify for pension income splitting, so consulting with a tax professional can help you determine eligibility and optimize your tax situation.
Pension Income Splitting: How to Determine Eligibility and Maximize Tax Savings
If you and your spouse or common-law partner are residents of Canada and meet certain criteria, you may be eligible to split pension income, leading to potential tax savings. Here’s what you need to know:
- Both you and your spouse must be Canadian residents on December 31 of the tax year being filed.
- In the case of a deceased senior, they must have been a resident of Canada immediately before their passing.
- You must be married or in a common-law partnership.
- You cannot be separated for a period of 90 days or more, including the end of the year.
Types of Eligible Pension Income:
- Income from a registered pension plan is generally eligible, regardless of your age.
- Registered Retirement Income Fund (RRIF) withdrawals, registered annuities, and interest from non-registered annuities qualify if you are 65 years or older.
Types of Ineligible Income:
- Old age security and Canada Pension Plan (CPP) benefits do not qualify.
- Investment income is not eligible, but converting investments to a Guaranteed Investment Annuity from a life insurance company can make it eligible. Consult a financial planner before making any transfers.
Choosing the Right Allocation:
- Determine which spouse has the higher income and allocate their pension income to the spouse with the lower income.
- This strategy reduces the overall tax bill by moving income from a higher tax bracket to a lower one.
- If one spouse has no qualifying pension income, transferring at least $2,000 can benefit them through the pension income amount.
Considerations and Deadlines:
- While pension income splitting can be beneficial, it’s important to assess other potential adjustments, such as nursing home housing fees based on income.
- Requests for pension income splitting must be made within three years of the filing deadline for the tax year in question.
- If you’ve already filed your return, keep in mind that income splitting could affect assigned benefits, credits, and refunds.
Remember, not everyone is eligible for pension income splitting, but if you meet the requirements, it’s a valuable option to explore and potentially save money on your tax return.