Pension income splitting is new – but is it right for you?

Tax season is looming and if you are currently retired or approaching retirement, you may be wondering if the new pension income splitting tax rules hold any benefit for you. Could be – pension income splitting can be a very effective way to lower a household's overall tax bill … but, as with any tax law, there are specific rules and conditions to pension income splitting that you need to look at very carefully to ensure the most optimal split for your situation.

Here are the basics of pension income splitting:

• Income that qualifies for splitting is different if you are under 65 or over 65 years of age. If you are 65 or older you can split pension income with a spouse who is under 65 – BUT in most cases, if you are under 65 you cannot split income with a spouse who is older than 65.
• While the new rules limit the pension i nc ome splitting allocation to 50% of the eligible pension income, any amount up to 50% may be allocated. In some cases, it may make sense to make an allocation of 50% of the eligible amount in one year, 30% in the other year and 0% in another.

• Remember that this is just an allocation for tax reporting purposes and the actual i nc ome does not have to be paid to the spouse.

Here are the fine points that can affect the value of a pension income splitting strategy:

• You can split income from a Registered Retirement Investment Fund (RRIF) with your spouse who is under the age of 65 only if you are at least 65. As well, if both you and your spouse are over 65, you can split RRIF income and both of you can still qualify for the pension income credit.
• Regardless of age, pension income splitting can also have some other consequences for the spouse receiving the allocation. For example, increasing the income of a lower earning spouse could have a negative impact on a number of tax calculations and credits including Old Age Security (OAS) benefits, medical expense credits, spousal credit, age credit clawbacks, and quarterly tax instalments.
• On the other hand, if your spouse has little or no other income and the pension split significantly reduces your taxable income, you may reduce or eliminate the OAS clawback.

You may email me at kian.ghanei@investorsgroup.com for any inquiries. Together we can help you decide whether pension income splitting will be an advantage for you and help determine what amount would best to allocate in order to minimize taxes for both spouses.