Don’t overlook the option of pension splitting
Does 2017 look like the year you might retire or scale back from your current job responsibilities or business activities?
Retirement income can come from many sources. Two of the most common ones are CPP and OAS which form the base of income for many retirees. Other sources include those lucky enough to be eligible for private pensions (municipal, provincial and federal employees, teachers, hospital workers and other union employees to name a few).
For those who have been self employed or employees without a private pension, RRSPs, RRIFs and savings have been the major source of retirement funds. TFSAs have also become a potential source of income to draw upon in those retirement years.
Canada Pension (CPP) and Old Age Security (OAS) do not qualify as eligible pension amounts for pension splitting. What does qualify? Pension splitting for Canadians was introduced in 2007. You and your spouse or common law spouse can agree to split up to 50 per cent of your, or your spouses, eligible pension income. If you are 65 or older, then eligible pension income includes income from a RRIF, RRSP, annuity, superannuation, foreign pensions or DPSP (deferred profit sharing plans).
If you are not yet 65, then the eligible pension income is restricted to pension amounts from superannuation or private pension plans. Annuity payments arising from the death of a spouse are also eligible. What is the big deal you might ask? Remember, in the year you turn 65 years of age, you are eligible for a pension credit of up to $2,000 or your actual pension income. If you are under age 65, then you may still be eligible for this pension credit if your pension income comes from a superannuation or private pension plan, or from annuity payments arising on the death of a spouse. Is there any catch? Yes. In order to pension split, you and your partner or common law partner must have been resident and lived in Canada at the end of the calendar year. As well, you must be married or living together at the end of the year.
If you were married or commenced living common law in 2016, then you may still pension split but it will be prorated by the number of months of marriage or relationship existed.
What are the benefits of pension splitting?
To reduce your overall tax bill. If one spouse is in a lower tax bracket than the other, then pension splitting offers this opportunity. Another benefit is that by splitting pension income with a spouse allows both spouses to claim the maximum pension credit of $2,000.
Another benefit is that pension splitting is elected each year. This means that you may pension split in 2016 but not 2017. Each year stands on its own.
When you complete your tax return and you wish to pension split, then you must complete the election form T1032 Joint Election To Split Pension Income for 2016. This form must be signed by both spouses to be effective.
Does it make sense to pension split all the time?
No. In those instances where both spouses have pension income and roughly the same taxable income, there might not be a benefit to pension split. However, this election can be made each year and therefore you have the benefit of knowing your circumstances before you decide to pension split or not. If it is favourable, then you can make the election. If it is not favourable or the benefits are very minimal (say under $10) you can decide not to make this election for that year.
If you have retirement income in 2016, consider making this election. If you plan to retire in 2017, then you can look forward to this benefit in the coming years.