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Opportunities for pension income splitting

The Canadian demographic landscape is shifting as more Canadians (i.e., baby boomers) approach or navigate their way through retirement.

Improved life expectancy is a good thing but also means savings must last longer. Not surprisingly, many people are concerned about running out of money. Below are some strategies that can save taxes, potentially preserve income-tested benefits and tax credits, and help people feel more confident about the years ahead.

You are allowed to split qualified retirement income with your spouse,1 which can result in a significant reduction of family taxes and can also minimize the impact on valuable income-tested tax credits and benefits. If you have a spouse who is in a lower tax bracket, you and your spouse can elect to transfer up to 50 per cent of eligible pension income to the lower income spouse. Eligible pension income is defined as income eligible for the pension income credit.

What types of income are eligible for the pension income credit and pension income splitting?

If you are under age 65 for the entire year, the following types of income qualify for pension income splitting:2

  • payments directly from a pension plan; or
  • payments from a Registered Retirement Income Fund (RRIF), annuity payments from a Registered Retirement Savings Plan (RRSP) or Deferred Profit Sharing Plan (DPSP) and payments from a nonregistered annuity, which have been received because of the death of your spouse.

  • If you are 65 or older, in addition to the above, income from RRIFs and annuities purchased with your RRSP and DPSP are eligible for pension income splitting. Government benefits such as Canada/ Quebec Pension Plan (CPP/QPP) and Old Age Security (OAS) do not qualify under the federal pension income-splitting rules.

    Generally, income from non-registered investments will also not qualify. One exception is income from an annuity, including a guaranteed interest contract (GIC) provided by an insurance company. A GIC from a life insurance company reports the interest accrued as annuity income, which qualifies for the pension income credit and thus pension income splitting for those age 65 or older. The interest element of a non-registered annuity contract (prescribed and non-prescribed) also qualifies for those 65 or older.

    See Tax Managed Strategy #14: The Pension Income Tax Credit Using an Insurance Company GIC (MK2071E) for more information on the pension income credit and insurance company GICs.

    Income splitting options

    Eligible pension income

    You can split up to 50 per cent of eligible pension income with your spouse. Because of income-tested tax credits and benefits such as the age and medical expense tax credits and OAS, the optimum transfer may be less than 50 per cent. Analysis will be necessary each year to determine the optimal amount to split to maximize the reduction in taxes and minimize the impact on income-tested tax credits and benefits.

    If you are between age 65 and 71, don’t have eligible pension income and would like some, consider converting a portion of your RRSP to a RRIF and then making a withdrawal. The RRIF withdrawal qualifies for the pension income credit and pension income splitting. This is particularly attractive if you plan to withdraw funds from your RRSP anyway. If you aren’t otherwise withdrawing from your RRSP, you should weigh the benefits of this strategy against the fact that you are withdrawing funds early from the tax-sheltered RRSP and paying tax before you otherwise would.

    Pension income splitting can potentially allow the recipient spouse to claim the pension income tax credit if they haven’t already claimed it. The pension income being split retains its “character” so the receiving spouse would have to qualify as if they earned the pension income themselves (i.e., be 65 or older if the eligible pension income is RRIF income, though there would be no age requirement for income from a pension plan).

    Canada/Quebec Pension Plans

    Although not part of the federal initiative with respect to pension income splitting, these government plans already allow spouses who are at least 60 years of age to share up to 50 per cent of the benefits earned while you were living together.

    Spousal RRSPs

    Contributing to a spousal RRSP can also result in tax savings. Unlike the pension income-splitting rules, spousal RRSPs provide income splitting at any age and are not restricted to 50 per cent if the attribution rules don’t apply.

    Withdrawals made from any spousal RRSP when a spousal contribution was made in the same calendar year or the two previous calendar years will be attributed back to the contributing spouse and included in their income. The amount attributed back to the contributing spouse is the lesser of the spousal RRSP withdrawal and the spousal contributions during that time. Otherwise, a withdrawal from a spousal RRSP will be taxed like any other RRSP withdrawal, to the withdrawing spouse. These attribution rules carry through and apply to spousal RRIFs with one important exception – they don’t apply to withdrawals of the RRIF minimum from a spousal RRIF.

    See Tax Managed Strategy #23: Spousal RRSPs (MK2680E) for more information on using spousal RRSPs.

    Example :

    Assume two spouses, both over age 65, living in British Columbia. The greatest benefit occurs by splitting an amount close to or equal to the maximum eligible. We have assumed a full 50 per cent split of eligible pension income and CPP.




    Company pension90,00045,00045,000

    RRIF/Spousal RRIF22,00012,00012,19021,810

    Gross Income132,31218,94277,50273,752
    OAS Clawback-6,942-562

    Age Credit31,315160244

    Net Taxes Owing-40,361-160-15,935-14,390Decrease 10,196
    After Tax Income91,95118,78361,56759,363Increase 10,196

    For illustration purposes only. Assumes 2018 British Colombia tax rates.

    Other income splitting strategies before retirement

    Inter-spousal loan

    The higher-income spouse lends money to the lower-income spouse at the prescribed rate so that investment income is taxed at their lower marginal tax rate. For more information on inter-spousal loans, see Tax Managed Strategy #6: Lower the family tax bill – income splitting using loans (MK1355E).

    Contributing to your spouse’s TFSA

    Provided your spouse is a Canadian resident who is at least 18 years of age and has available TFSA contribution room, you can transfer property or funds to your spouse to contribute up to that amount to a TFSA in their name without any tax consequences or income attribution.

    Family budgeting

    Have the higher income earner pay for all family expenses while the lower income earner invests their income. This allows the couple’s investment income to be earned in the hands of the lower income earner and taxed at a lower marginal tax rate.

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