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The tax benefits of splitting pension income

One easy way to minimize your tax burden when you are retired is pension income splitting. Pension income splitting is for Canadian residents who are married and, usually, where the recipient spouse is aged 65 or older. It allows them to make a reallocation of private pension income between them on their annual tax returns. And because of our progressive tax system, it lowers your overall family tax bill. The taxpayer who receives the private pension income during the year is entitled to allocate up to one-half of that income, without any dollar limit, to his or her spouse for tax purposes. Private pension income means a pension received from a former employer and, where the income recipient is age 65 or older, payments from an annuity, an RRSP or a RRIF. Government pension income like CPP or OAS does not qualify. To split the pension income, you must file Form T1032 Joint Election to Split Pension Income.

No funds are actually transferred using pension splitting. It is just a method for reducing the taxable income of one spouse by allocating income on the tax return to the other spouse.

If both spouses are in the same tax bracket, it would seem that pension income splitting is not beneficial. However, there is still a benefit as it creates a federal pension tax credit of $2,000 for eligible pension income.

If you are turning age 65 and you are not receiving eligible pension income, you may wish to convert a portion of your RRSP to an RRIF. This would allow you to receive the pension tax credit for yourself and your spouse.

Income splitting with the spouse also becomes easier once you reach 65 years of age. The Tax on Split Income (TOSI) will no longer apply to any amount your spouse receives from the practice. You are free to income split as you had done in the past before the TOSI rules became law.

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