Income splitting strategies in retirement

Income splitting is not an easy strategy to accomplish in Canada. We live in a tax system where every individual must report their personal income and pay tax individually.

Income splitting is a strategy where couples try to move income from a spouse in a higher tax bracket to a spouse that is in a lower tax bracket. The government has been tough on income splitting because it would mean much lower tax revenues to them. For example, an individual who makes $70,000 per year would pay considerably more tax than a couple that earned $35,000 each.

Related article: Canadian Marginal Tax Brackets

Although couples are not allowed to pool their income and report it in a split fashion, there are some income splitting strategies for Canadians. In this article, I will share with you three income splitting opportunities for retirement.

Pension Splitting

As of January 1, 2007 individuals who are 65 years of age or older can allocate for tax purposes up to a maximum of 50% of the annual income received from a lifetime annuity, registered pension plan, RRSP annuity, registered retirement income fund (RRIF) or deferred profit sharing plan annuity to a spouse (or common-law partner or same-sex partner). Although the actual income is still received by the individual, the splitting for tax purposes is done via the tax return. The receiving spouse is not required to be 65 years of age or older to receive an allocation, and the amount allocated can be changed each year for the benefit of the couple. This is great news for senior couples.

Related article:  Understanding Pension Splitting rules

For those individuals under age 65, pension splitting only applies to those who receive lifetime annuity payments from a registered pension plan. RRIF income cannot be split under age 65.

Spousal RRSPs

With the new changes to pension splitting, spousal RRSPs are not as beneficial for those over the age of 65. However, they still make sense for income splitting under the age of 65. Spousal RRSPs simply allow a spouse that is in a higher marginal tax rate to contribute to a spousal RRSP in the name of the lower income spouse. For example, my spouse Liz is in a lower tax bracket than me so conventional thinking is I should contribute to Liz's spousal RRSP instead of my personal RRSP. That way, when she withdraws the money, she pays the tax instead of me (as long as she we follow the 3 year attribution rules).

Related article: The proper use of Spousal RRSPs

The key to benefiting from spousal RRSPs is planning ahead and looking down the road to retirement. A 60 year old cannot arbitrarily assign some of his or her RRSPs to a spousal RRSP. It has to be done at the time of contribution. Don't wait to plan when it might be too late. Start early.

Canada Pension Plan splitting

Similar to pension splitting, couples can split their CPP retirement benefits. The only reason you would do this is if the spouse with the higher CPP is in a higher tax bracket than the lower CPP earner. Unlike pension splitting, both spouses must be over the age of 60 and both must be collecting CPP. Also, the split between spouses must be 50-50 and no other fashion. For example, if the higher income spouse earns $700 per month and the other spouse earns $300 per month, CPP allows each spouse to take $500 per month ($700 plus $300 divided by 2).

Related article:  Understanding CPP Sharing (CPP Splitting)

Although the government is tough on income splitting, there are strategies for Canadians to lower the tax bite.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.

For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

27 Responses to Income splitting strategies in retirement

  1. I have a question Eg: divorce settlement offer. Roll over a lump sum of RRSPS to other spouse RRSP. Who pays the tax on this and when or how is tax taken out?
    Thank you

    • The tax is paid when withdrawn in the plan holders name. In the case of a spouse, there may be attribution of tax back to the contributor if contributions were made within the last 3 years.
      I hope that helps!
      Jim

  2. I receive monthly oil royalty income.

    Can i split it with my wife to lower my tax.

    Can it qualify for pension income?

  3. I have a question about pension splitting. If the higher income earner doesn’t plan to retire until age 65, does it still make sense for them to contribute to a spousal RRSP on behalf of the lower income earner? I’m thinking that at retirement (age 65) the higher income earner starts to receive income from their RRIF, and the income is split (or taxed) 50/50 to each person, and then both people will be (roughly) in the same tax bracket. In this scenario, I’m not sure if spousal RRSPs are worth while, but I could be missing something.

    Thanks!
    Nicole

    • Hi Nicole,
      I hope that Jim doesn’t mind me answering this question for you.
      There are a few issues at play here. One of them is that you don’t have to convert your RRSP to a RRIF (and therefore start mandatory withdrawals) until age 72 (conversion happens at 71, withdrawals at 72). Saying that, it may be beneficial (or necessary) for you to start drawing down your RRSPs before age 71.
      Next, regular RRSP withdrawals are not eligible for income splitting, only RRSP annuities.
      Evening out your RRSP amounts are beneficial with a spousal RRSP, as recommended by Jim.
      Best of luck,
      Steve B.

  4. Can a lump sum payment box 18 t4a( from RPP that can not be transferred) be split with a spouse who is on disability pension? Software wouldnt do it that way, but if I switched the amount to a annuity box 16 t4a(just seeing if splitting was working) it split the amount I selected to the spouse.
    Thanks, your blog has been very informative and I recommend all my seniors to check it out… I volunteer with seniors

  5. Where does it say that both spouses must be over 60 and be collecting cpp? Sevice Canada says

    “If only one of you contributed to the Canada Pension Plan (CPP) and/or the Quebec Pension Plan (QPP), you can share the one pension.”

    There is no mention of being 60 for the spouse who did not contribute to cpp. Am I misreading this?

    Philip

  6. My wife is retired now and I am still working three days a week.
    She is 56 i am 58 we are pulling from her rrsp for an income,for her
    is it possible to split my income with her to reduce my income tax
    contribution. If so what amount can we split.
    Thanks
    Mike

  7. Same-sex partners aren’t a separate category from common-law partners or spouses. I know this isn’t the point of the article, and I am not an internet vulture, but it’s not helpful to perpetuate the idea that same-sex couples are still a different legal entity. Thanks for your great articles all the same.

  8. We started income splitting well before retirement. We took advantage of the low interest rates to establish multiple spousal loans. Doing so enabled us to move investment income for my tax bracket to my spouses lower incremental tax bracket. This one strategy has saved us a fair amount of tax over the past eight years or so. We also moved to a fee for service financial advisor. One of the spin off benefits was the ability to write off he fees each year as they were paid.

    We do exactly the same with our pensions-both my DB pension income and my CPP pension.

  9. I will have a healthy pension when I retire, and my wife will have none. By choice and for various reasons, for the past 35 years, my wife and I chose to live on my larger income and save almost all of her income. Consequently, in our retirement, most of the investment income we will receive will be taxed in my wife’s hands. Splitting of my pension will allow for further tax minimization. Does CRA have anything to say about this choice of saving one spouses’s income and spending the other? Surely CRA does not force a couple to spend and save proportionate to each spouse’s income, do they?

    • Ray,
      I hope that Jim doesn’t mind me weighing in here, but you have put together an excellent plan and a means of reducing tax that is totally legal and acceptable. No, the CRA doesn’t care about spending and saving proportionately.
      Regards,
      Steve B.
      Fee-for-service planner

  10. “For those individuals under age 65, pension splitting only applies to those who receive lifetime annuity payments from a registered pension plan.”

    Can anyone tell me why this is the case? My wife and I are 60-ish, retired and fund our living from RRSPs amongst other non-pension sources. We have no pension plan, so no other choice but to draw down our RRSP. It seems unfair and arbitrary that we can’t “pension split” our RRSP withdrawals. Please inform me. Thanks!

  11. Enjoy all these tax benefits while those of us who are single or are interdependent with friends, siblings or adult children subsidize your tax advantages.
    I guess our society decided that it was best for the country to have people bonded in sex and marriage.

  12. Jim, great article that our Personal Pension Plan clients and future prospective clients should read.

    If I may make a humble suggestion, you might want to also include a discussion about the $2,000 annual non refundable pension amount credit that people doing pension income splitting can also claim to further reduce the tax burden on the couple.

    Take care,
    JP Laporte
    CEO
    INTEGRIS Pension Management Corp.

  13. My husband receives U.S. Social Security and U.S. union pensions. Can this be split on spouses return if over 60 and he is 66? I am thinking probably not.

    Also can his GIS be split to spouse over 60? Probably not again?

  14. Great article. I’m kicking myself for not doing more to understand that income splitting before 65 is limited. At least I found this out at 45 so I have a few years to do this. Started putting my portion of my company RSP into a spousal RRSP. Unfortunately the company contribution must go into my RSP. It should still help though!

  15. I am 66 and fully retired whilst my wife is 57 also fully retired with no income, can I split my CPP & OAS pension income with my wife.
    We both receive 15k each per year from our investments, so can I split my 15k with my wife so she would declare 22,500k as her income plus 50% of my pension income?

    Many thanks

    Mike

  16. I’m totally confused with income and or pension splitting, are they one of the same?

    Could you help me in my situation whereas my wife (57 yrs) and I (66 yrs) are have both just passed our first year of full retirement and now the 2017 taxes beckons.
    Currently we receive 30k per year from our investment savings, we also receive my OAS & CCP for an approx total 45k. Which would be the most tax effective way to do the taxes?

    Thanks in advance

    Mike

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