Spouses are allowed to split qualified retirement income with their spouse or common-law partner. This can result in a reduction of family taxes and can also minimize the impact on income-tested tax credits and benefits.
If you have a spouse, or common law partner, who is in a lower tax bracket, you and your spouse will be able to elect to have up to 50 per cent of eligible income transferred to the lower income spouse. Eligible income is defined as income eligible for the pension income credit.
Under age 65, only income received directly from a pension plan or received because of the death of your spouse qualifies for pension income splitting. Income from other registered plans such as RRIFs, annuities purchased with your RRSP and Deferred Profit Sharing Plans are only eligible for splitting if you are age 65 or older. Government plans such as Canada Pension Plan and Old Age Security do not qualify under the federal pension income splitting rules.
Generally, income from non-registered investments will also not qualify. One exception is when the income is received from 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 at age 65. The interest element of a non-registered annuity contract (prescribed and non-prescribed) is another exception for those age 65 or older.
Income splitting options
Eligible income — You can split up to 50 per cent of eligible income, described above, with a spouse or common law partner. Because of income tested benefits such as age credits, medical expenses and claw backs on Old Age Security, the optimum transfer may be less than 50 per cent.
Canada Pension Plan — 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. Under current rules, RRSP and RRIF income can only be split at age 65 or older. However, spousal RRSPs provide income splitting at any age and are not restricted to 50 per cent. Also, if your spouse is younger, the income can be delayed until the year after your spouse reaches age 71.
Ideal candidates
Those age 65 or who are currently receiving income directly from a pension plan. Those who have a spouse in a lower tax bracket. Please remember to always consult your investment advisor before taking any action.
Stuart Kirk is a Wealth Advisor with Precision Wealth Management Ltd and an Investment Funds Advisor with Manulife Securities Investment Services Inc. The opinions expressed are those of the author and may not necessarily reflect those of Precision Wealth Management Ltd or Manulife Securities Investment Services Inc. For comments or questions Stuart can be reached at stuart@precisionwealth.ca or 250-954-0247. Website www.precisionwealth.ca.
