Have you heard of tax planning opportunities that offer the possibility of saving hundreds, or thousands of dollars in tax? All while increasing eligibility for government benefits with no advance planning, no expenditure of funds or time? This actually describes pension income splitting, a strategy to allow married taxpayers over the age of 65 (or in some cases, 60) to minimize their tax bill by dividing their pension incomes. Kerr & Company provides Kelowna tax services so that you, too, can benefit from this unique tax planning strategy.
Because of very little coverage in the media, many Canadians have never heard of it. We’re so focused on the messages regarding contributions to registered retirement savings plans (RRSPs) or tax-free savings accounts (TFSAs). Pension income splitting is rarely mentioned and gets put on the back burner. It is one of the very few tax planning strategies that solely benefits the taxpayer.
If you take a look at the information provided with your annual tax return form issued by the Canada Revenue Agency (CRA), you’ll notice that the benefits of pension income splitting aren’t at the forefront. Plus, the form needed to start a pension income splitting strategy isn’t included in the General Income Tax Return package. You must order it from the CRA or download it from the website.
The Income Tax and Benefit Guide issued by the CRA for 2017 returns does mention the pension income splitting option but it only explains the filing process with no listed of benefits. So, unless you’re knowledgeable in this area, it’s very unlikely that you will proceed which means opportunities and money are being left on the table which could significantly reduce tax bills.
Dividing income between spouses lowers tax bills because Canada’s tax system is a “progressive” tax system, in which the rate of tax levied as income rises.
To explain, the first $46,000 of 2017 taxable income attracts a combined federal-provincial rate of around 25%. The next $46,000 of such income, however, is taxed at a rate of just under 35%. When taxable income exceeds $142,000, the tax rate can be 50%. Although every provincial rate varies, nearly all provinces and territories increase the tax rate as income increases. Alberta is an exception with a flat 10% tax rate on all individual taxable income; the federal rates increase as income rises as with other provinces and territories.
Dividing income allows a greater proportion of that income to be taxed at lower rates and the total tax payable will be reduced. Because of this, our tax laws include a set of rules known as the “attribution rules”. They prevent strategies to divide income in this way. Pension income splitting is a government-sanctioned exception to those attribution rules.
When it comes to pension income splitting, taxpayers who receive private pension income during the year are entitled to allocate up to half that income with a spouse for tax purposes. A private pension income includes any pension received from a former employer, payments from an annuity, an RRSP, or a registered retirement income fund (RRIF) and the recipient is over the age of 65.
Government source pensions, like payments from the Canada Pension Plan, Quebec Pension Plan, or Old Age Security payments do not qualify for pension income splitting.
Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032(E)17, Joint Election to Split Pension Income for 2017, with their annual tax return. That form can be found on the CRA website, ordered by calling 1-800-959 8281 or Kerr & Company, Kelowna tax services, can assist you.
Since this strategy affects both spouses’ income and their tax liability, the election must be made and the form filed by both spouses. The spouse who actually receives the pension income must deduct from their income what was allocated to his or her spouse. That deduction is taken on line 210 of their return for the year.
The spouse to whom the pension income is being allocated must add that amount to his or her income on the return, this time on line 116.
In order to provide the best Kelowna tax services, we suggest planning the pension income splitting sooner than later. By the time spring tax season gets here, it will be too late to reduce taxes for the 2017 tax year. However, if this is something that may benefit you and your spouse, contact us now so that we can get a tax planning strategy in place now so that you don’t miss out on opportunities in 2019.