What is income splitting in Canada?
Income splitting is when you transfer income from one family member to another, so you don’t pay as much tax. Having income taxed in the lower earner’s hands reduces the overall tax a family pays. The Income Tax Act’s “attribution rules” make this problematic by generally redistributing any income capital gain; or loss that is earned or realized on money transferred to a family member back to the original transferor; however, income splitting is allowed in a lot of situations despite these exceptions.
The purpose of this detailed blog is to provide information on what is income splitting and how it works.
It is possible to split your pension income up to half with your spouse or common-law partner under traditional income splitting. The federal pension income credit of $2,000 applies to pension income that is also eligible for splitting.
It includes both annuity-type payments from registered pension plans (RPPs); regardless of age, and withdrawals from registered retirement income funds (RRIFs) and life income funds (LIFs); once you reach 65 years of age. The Canada Pension Plan (CPP) retirement pensions cannot be split in the same way; but you may be able to share them with your spouse or partner.
People over 65 who turn part of their RRSP into a RRIF may benefit from pension splitting. Any withdrawal from your RRIF, regardless of its minimum amount, qualifies for pension splitting. A withdrawal from an RRSP is not considered to be pension income.
Splitting a pension income with a spouse or partner requires you to use Form T1032. Split-pension income may be deducted on line 21000 of your tax return up to 50% if you opt for split-pension. Split-pension amounts are added to your spouse’s or partner’s income on line 11600.
Transferring a spouse or common-law partner
Joint elections to split pension income are based on the fact that transferring spouses or common-law partners get pension income; and choose to share some of it with their spouse or common-law partner (the receiving spouse or common-law partner).
Receiving a spouse or common-law partner
A joint pension income split is made by splitting the eligible pension income of the receiving spouse or common-law partner with the transferring spouse or partner (the transferring spouse or common-law partner).
When you have a marginal tax rate that is significantly lower than that of your family members; you can use some income splitting strategies. It may be possible for retirees to reduce their overall taxes by splitting their pensions; which may necessitate converting some RRSPs to RRIFs.
Income splitting can also be accomplished through a spouse’s or partner’s RRSPs. You might consider having the higher-income spouse or partner pay all household expenses; or making a prescribed-rate loan to family members, perhaps through a family trust; if the higher-income spouse or partner owns or expects to own significant non-registered investments.
If you still have questions about income splitting; ask consult with WTC Chartered Professional Accountant could save you thousands of dollars in taxes each year.