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What Is Pension Income Splitting?

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If you are a retiree then this blog is just for you. Read on to find out more about pension income splitting and how it can be helpful for you.

Pension Income Splitting

Source: Freepik

Are you a federal retiree and paying over one-third of your pension in income tax? If this is the case, keep browsing, as we will tell you how to lower your tax outgo.

Pension income splitting is a legal way to lower your income tax burden that will help you to reduce your taxable income. Let us find out more about this technique of tax management. 

Are You Eligible for Pension Income Splitting?

How Old Are You? The scheme of pension splitting is available to only those individuals who are above the age of 65 years at the end of the year. If you are 65 or less, you cannot take advantage of this benefit. 

What Is the Percentage of Pension Income Split?

All the eligible individuals have the facility to split up to 50% of the pension income with:

  • Your spouse 

or

  • Your common-law partner

Further, if you are eligible and have split your pension income, you will require to fill out a form by “Joint Election to Split Pension Income” filing your income tax returns. 

We can access this form from this link.

What Is Eligible Pension Income?

As per the current laws associated with pension income splitting, only the amount of eligible pension income you can split with the spouse or the common-law partner. 

This eligible pension income is an aggregation of the following receivables:

  • The taxable annuity payments received from:
    • Superannuation
    • Pensions funds
    • Retirement plans
  • Annuity payments and proceeds from R. R. S. P (Registered Retirement Savings Plan)
  • Amounts distributed from Retirement Compensation Arrangement that are qualified
  • Income from D. P. S. P (Deferred Profit-Sharing Plan)
  • Regular annuities received from I. A. A. C (Income Averaging Annuity Contracts)
  • Retirement benefits and all the retroactive lump-sum payments received from R. P. P (Registered Pension Plans)
  • Income received from R. R. I. F (Registered Retirement Income Fund)
  • Benefits received from E. B. P (Employee Benefit Plans)
  • Any pension received from foreign, such as the U.S. Social Security

What is Ineligible Pension Income?

An ineligible pension income refers to the pension income you cannot split with the spouse or the common-law partner under the present rules. 

It refers to the following amounts:

  • All the payments that are associated with old age security
  • Payments received from:
    • Canada pension plan
    • Quebec pension plan
  • Any pension income received from foreign and is tax free in Canada
  • Income received from I. R. A (Individual retirement Account) run by the United States
  • Line 11500 amounts received from R. R. I. F (Registered Retirement Income Fund) and transferred to:
    • Another R. R. S. P (Registered Retirement Savings Plan)
    • Another R. R. I. F (Registered Retirement Income Fund)
    • Another annuity plans

Conditions to Meet for Splitting the Pension Income Legally?

You can split the pension income legally and reduce the income tax burden while remaining compliant. You need to understand the conditions laid down by the current Canadian laws. 

The following are the rules or the conditions:

Condition I: 

  • For 90 days (about 3 months) or more at the beginning of the tax year 

and 

  • At the end of the tax year:
  • You and your spouse were not living separately because of marital disputes.
  • You and your common-law partner were not living separately because of conflicts in the common-law partnership.

Condition II:

  • On the last day of the year (that is 31st December):
    • You and your spouse are both residents of Canada

In case of death of either the transferee or the spouse/ common-law partner,

  • Resident upon the date of such demise

Condition III:

  • The pension income that you received during the year is eligible for split
  • You are 65 years of age or above on the last day of the year

Note: To do income splitting, you are required to meet and satisfy all the three conditions mentioned above

What is Pension Income Split?
Source: Freepik

How does Pension Income Splitting Work?

The primary advantage of pension income splitting is it helps you lower your income tax liability by reducing your taxable income. 

Using this technique, you can reduce up to 50% of your taxable pension by splitting it with your spouse or common-law partner. Let us understand this through a practical example.

Mr. A is a 67-year-old federal retiree and wants to split his pension income with her spouse. He has received the following pension amounts during the year:

Source of Pension IncomeAmount
Annuity payments and incomes from R. R. S. P$40,000
Income from D. P. S. P$30,000
Regular annuities received from I. A. A. C$35,000
Total$105,000

Mr. A can split the pension income up to $52,500 (50% of $105,000) with his spouse. By doing so, he will lower his tax liability in the following manner:

Income Tax Liability Before 50% Pension Split

Income Tax SlabsTax RateTax Amount
On the first $49,02015%$7,353
On the next $49,02020.5%$10,049.1
On the next $6,96026%$1,809.6
 Total19,211.7

Income Tax Liability After 50% Pension Split

Income Tax SlabsTax RateTax Amount
On the first $49,02015%$7,353
On the next $3,48020.5%$713.4
 Total8,066.4

One can observe that Mr. A has reduced his tax liability from $19,211.7 to $8,066.4, representing a 58% savings in taxes.

References:
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-31400-pension-income-amount/you-claim-pension-income-amount-5.html
https://fbc.ca/blog/how-use-income-splitting-reduce-your-tax-bill/
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-31400-pension-income-amount/you-claim-pension-income-amount-3.html

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