Retirement chronicle bnc.ca/retirement - Chronicle N°25

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Income splitting: A strategy that pays

Some tax strategies allow couples to allocate their income better, and reduce the amount of tax they pay. Such is the case with a spousal RRSP contribution, which is relatively well known. However, many taxpayers are still unaware of a new tax rule that has been in place since 2007. This provision, known as pension income splitting, could help you save significantly on taxes.

Samyr Mehaïlia: Financial planner

Spousal RRSP contributions are considered to be an income splitting measure. For them to be effective, the wealthier member of the couple has to be the one contributing to the RRSP of his or her spouse. The spouse making the contribution can deduct that amount from his income. As a general rule, if you anticipate your income being higher than your spouse's once you retire, it's to your benefit to contribute to his RRSP. Your spouse can then make withdrawals and your income can be shared after retirement.

Pension income allocation (that is, splitting) can result in significant income tax savings. Because tax rates rise with income earned, it is usually more advantageous to declare two lower incomes than one higher one (for example, two incomes of $40,000 versus one of $80,000). To do so, the beneficiaries of pension income can transfer up to 50% of this income to their spouse when filing their income tax returns. In this case, it's a virtual transfer; unlike a spousal RRSP contribution, no funds are actually exchanged. The income amount allocated to the spouse can change from year to year, depending on each spouse's tax situation. Similarly, in the same year, it can be different on federal and provincial tax returns. 

There are several rules governing income splitting. For example, only certain types of income are eligible under this tax measure, and these change depending on whether the spouses are under or over age 65. It is therefore important to be fully informed before taking advantage of this strategy.

Income splitting offers significant benefits, despite the somewhat complicated regulations. To figure it all out, don't hesitate to call your advisor!

 

Samyr Mehaïlia

Financial planner

National Bank

Organizations: Retirement chronicle National Bank

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