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Tips and Traps About Income-Splitting for Seniors

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Retirees can split income between the higher and lower income earning spouses. Some income splitting can be done on the individual’s tax return but to take the best advantage of it, some advanced planning is needed. Not all types of income can be split so it’s good to know about some tips and traps about income-splitting for seniors.

A basic rule of thumb is, any income you receive that qualifies for the federal pension income credit is eligible for splitting. Allowable amounts differ depending on the age of the person receiving the payment. For people who turned 65 before the end of 2013, the following income sources qualify:

  • Income from Deferred Profit Sharing Plans (DPSPs)
  • The taxable portion of regular annuities
  • Lifetime retirement income from pension plans
  • Variable retirement benefits from any employer pension plans (RPPs or PRPPs)
  • RIFF or LRIF income, or income from a Saskatchewan Pension Plan (SPP)
  • Defined Benefit payments

People younger than 65 can split income from an RPP or SPP. But DPSP, RRIF or LRIF income is only eligible when received as the result of the death of a spouse.

You can’t split CPP income on tax returns, so advanced planning is required. You need to apply to Service Canada to do this. They will assess both clients contribution history and decide how the benefits may be split, so start the process in good time to be able to do it the following year.

You also can’t split OAS benefits, income from American IRAs, retiring allowance payments, or death benefits. Likewise, the tax-free portion of any foreign sourced pension is not eligible to split or payments from a Retirement Compensation Agreement (RCA).

Who is eligible?The spouse’s age does not matter as long as the recipient of the pension income qualifies to do so. Both must be Canadian residents at the end of the year and living together. Exceptions are made for medical, educational or business reasons, but for being separated or divorced.

Each party must fill out a CRA form T1032 (Joint election to split income) and attach it to their tax return. The act allows up to 50% of the total pension income to be split, but the individual taxpayer can decide on the percentage. The respective marginal tax rates of both parties is usually the primary driver of the split percentage, but there are other considerations as well. The clawback levels impacting OAS and the age credit also factor into the calculation, as there can only be one partner over age 65 which can lead to some interesting end results. Even if both partners are in similar marginal tax brackets, there is potential for some savings by assigning more income to the younger spouse who is not impacted by clawbacks.

One suggestion is to transfer as least $2,000 of pension income every year, making it possible for both partners to claim the $2,000 pension income credit.

The amount of income that can be split depends on the age of the person transferring the funds and the type of income transferred. And like most government programs, it gets complicated. And to add to the complication, the percentage of split can vary each year, so it’s best to work with a trusted financial advisor to sort this all out.

Image used by permission, Dries van Assen