Pension Income Splitting: Provides Tax Planning Opportunities for Couples

I had indicated in my Fall 2007 letter that this article would be a real life example of planning for

elder care financially with one of my clients. However, I am receiving many queries on Pension

income-splitting, and feel that with the tax season fast approaching, that I should provide a brief

overview of the opportunities that exist. Look for more information on financial matters from your

parent's perspective in my Spring 2008 newsletter.

Originally announced in the "Tax Fairness Plan' on October 31, 2006, Pension Income Splitting

will take effect for the 2007 taxation year. Being able to split pension income provides an

opportunity for couples to reduce their overall family tax bill by taking advantage of a spouse's or

common law partner's (hereinafter referred to as "spouse") lower marginal tax rate where

retirement incomes of spouses are disproportionate.

The rules allow a Canadian-resident individual receiving eligible pension income to allocate up

to 50% of this income to his/her spouse. To make an allocation of income, each spouse must

make an election on their income tax return each year. For income tax purposes, the amount

allocated will be deducted from the income of the spouse who actually received the eligible

pension income and added to the income of the other spouse.

The definition of eligible pension income is the same definition used for determining eligibility for

the pension income tax credit (increased to $2,000 effective 2006), such that individuals

currently eligible for this credit will also be eligible to split pension income with their spouse. It is

important to remember that it is the age of the spouse entitled to the pension income that is

relevant in determining the eligibility for pension income-splitting, such that it is possible to

allocate eligible pension income to a spouse who is under age 65.

Ineligible income includes Old Age Security (OAS), Guaranteed Income Supplement (GIS), Canada/Quebec Pension Plan (CPP/QPP) (1), RRSP withdrawals and

income from retirement compensation arrangements (RCAs).

Let's take a look at an example of how pension income splitting works. Assume that both you

and your spouse are age 65 and reside in B.C. Further assume that you earn interest and other

income of $100,000 and $50,000 of (eligible) pension income, whereas your spouse earns only

a total of $30,000 of interest and other income.

In preparing your 2007 tax returns, you and your spouse agree to split your pension income to

allocate 50% (ie. $25,000) of this income to your spouse which will reduce your taxable income

by an equivalent $25,000.

Your overall family tax savings in 2007 will be approximately $3,500 (ie. $10,900 - $7,400) as a

result of taking advantage of pension income-splitting. You would save approximately $10,900 in

combined federal and provincial tax by avoiding tax on this $25,000 amount at the top marginal

tax rate. Your spouse’s combined federal and provincial tax owing would increase by approximately

$7,400 at the lower marginal tax rates (with the additional $2,000 pension tax credit offsetting

much of the reduction in the age credit).

Eligible Pension Income

If you receive the following type of income, it will qualify for pension income splitting purposes.

You Are 65 or Over and Receive:

1. registered pension plan payments;

2. RRIF payments (includes LIF and LIF payments);

3. lifetime annuities from registered plans; or

4. prescribed and non-prescribed annuities (interest component only)

You Are Under 65 and Receive:

1. registered pension plan payments; or

2. amounts (2) to (4) above only if received as a result of the death of a spouse.

(1) Income splitting already exists for CPP/QPP recipients. Spouses who are both at least 60

years old can elect to share their CPP/QPP pension benefits.

You must apply to the government requesting an equal share of the retirement benefits you both

earned during the years you were together. The amount of CPP/QPP that is split depends on

how long you and your spouse have lived together and your contributions made to CPP/QPP

during that time. If only one spouse is a CPP/QPP contributor, you may share that one pension.