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.
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.
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.
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?
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!
I receive monthly oil royalty income.
Can i split it with my wife to lower my tax.
Can it qualify for pension income?
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.
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,
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
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?
One cannot collect CPP under 60 so there’s nothing to split or share
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.
What is the date the above article was written? Many thanks
Today, Nov 21, 2017
hank you, Jim, these are excellent tips. 🙂
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.
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.
My accountant does this already but thank you .
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?
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.
“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!
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.
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.
INTEGRIS Pension Management Corp.
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?
If he receives gis he very likely pays no income tax, therefore no advantage to splitting
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!
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?
Mike – You can never split OAS. You can pension-share CPP only once she’s at least age 60 and in receipt of her own CPP (if she ever contributed). I can’t answer your other question, but I think not.
Cheers Doug excellent advice!
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
“For those individuals under age 65, pension splitting only applies to those who receive lifetime annuity payments from a registered pension plan.”
I plan to retire at 60 and receive my PSSA pension. I assume this pension will be eligible for income splitting? My PSSA Pension Estimates Statement calls the pension benefit option a “deferred annuity”. The wording is somewhat confusing for those of us who are not pension experts.
I require a point of clarification that would be beneficial. I understand the value of converting an RRSP into a RRIF (to allow Pension Splitting). However I’m not clear on what amount of the annual withdrawal can actually be split to the maximum ratio of 50:50. Assuming one converts an RRSP to a RRIF at age 65 and wanted to start pension splitting at age 67 with their younger spouse they would be obligated to withdraw a minimum of 4.38%. However in order to be able to delay receiving CPP and minimize the withdrawal rate from my locked in retirement vehicle that was created with the commuted value funds from my company pension plan we plan on living off of our RRSP investments first. My question. Let’s say the amount being withdrawn from the RRIF needs to be 10% to meet our financial needs. Can the full amount be split of just the mandatory 4.38% be split?
I haven’t been able to find out what happens in the year you turn 65. My husband turns 65 mid this year. Can he split RIF income with me in this tax year and if so can he split all income withdrawn during the entire tax year or only that taken after his birthday.
My understanding is that in order to be able to split RIF income in the first place both spouses have to be 65 or older. If both parties have indeed reached the age 65 then your question above is valid and would require an accurate determination from a professional. Making an error at this point could end up being very expensive. How could this happen? Let’s say it is only the amounts withdrawn after both parties have reached the age of 65 and not just in the year both parties have reached 65. Let’s further assume that this error is not caught at time of assessment and then determined invalid if picked up at a future reassessment. My understanding is that the potential penalties could far exceed any tax savings you might have had otherwise.
Please ignore my previous comment. I just reread Jim’s artical and I realize I provided erroneous information regarding the age of the receiving spouse. Here is a quote from Jim’s article. “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”. My apologies.
My husband and i have been splitting our salaries (pensions) we are retired. can we still continue to do that for 2017.
A question regarding Pension Income Splitting that I have not been able to find an answer to after extensive internet searching, including the CRA website.
The question is not about the eligibility criteria (i.e. ages and retirement income sources), nor the tax return reporting, nor strategies or impacts for OAS or CPP, etc etc.
The question is in regards to the amount that has been elected to be transferred to the receiving spouse (and designated as such on our respective tax returns).
Can this amount – for discussion sake let’s say the transferred amount is $15K – be given to the receiving spouse so that they can then invest it in their name without it being impacted by the attribution rules normally associated with money gifted to a spouse for investment. The intent being the investment income earned from the split pension amount (i.e. $15K) would then be taxed in the receiving spouse’s name.
All the articles & information regarding pension income splitting have focused on the tax savings when filing (which is good) and the other aspects mentioned in the 2nd line above. However I have not been able to find information that suggests the amount can, or cannot, be given to the receiving spouse for investment purposes (and not be subject to the attribution rules).
Most articles mention the amount does not have to be transferred for the tax election but I am interested in actually transferring it, if it is permitted.
I’m not sure this is the whole answer and it doesn’t seem intuitively sensible tax policy but I found this at https://www.taxtips.ca/personaltax/attribution-rules-re-gifts-transfers-loans-to-spouse-or-related-minor-child.htm :
“When pension splitting is done on a tax return, it is likely that the lower income spouse will have a refund of the income tax deduction that is also split in relation to the pension. S. 153(2) of the Income Tax Act states that the tax withheld in relation to the split-pension amount is deemed to have been deducted or withheld on account of the pension transferee’s tax and not on account of the pensioner’s tax. Thus, the tax refund will not be subject to attribution.”
So it seems the full $15K doesn’t become available for investing in the spouse’s name: Only the withholding tax on that amount.
I am 66 and am receiving income from a RRIF and a LIF. My wife is 60 and is semi-retired. May I split some of RRIF and LIF income with her even though she is not 65.
My Wife and i have been married 59 years and have not been applying any income splitting of CPP can i do a tax adjustment to CRA and if so how far can i go back in years can i adjust?
Hi Steve – No, you can’t do a tax adjustment with CRA to share CPP income. You have to apply to Service Canada for CPP pension-sharing and there is no retroactivity to this provision.
I understand that CPP (Credit) Splitting is non-reversible, i.e. An ex-wife takes the split, upon her passing, what she was receiving as a result of the split, does _not_ return to me. Is this indeed the case? Which, again, I understand this to be different from CPP Pension Sharing.
Hi Scott – You are correct on both points. CPP credit-splitting is permanent and is not reversed if one ex-spouse dies, and CPP pension-sharing is temporary and will end automatically if one spouse dies.