Opportunities for pension income splitting

Tax Managed Strategy 15
Spouses¹ are allowed to split qualified retirement income with their spouse. This can result in a reduction of family taxes and can also minimize the impact on income-tested tax credits and benefits. If you have a spouse who is in a lower tax bracket, you and your spouse are able to elect to have up to 50 per cent of eligible income transferred to the lower income spouse. Eligible income is defined as income eligible for the pension income credit.
What types of income are eligible?
Under age 65, only income received directly from a pension plan or received from other registered plans or an annuity because of the death of your spouse qualifies for pension income splitting. Income from other registered plans such as Registered Retirement Income Funds (RRIFs), annuities purchased with your Registered Retirement Savings Plan (RRSP) and Deferred Profit Sharing Plans are only eligible for splitting if you are age 65 or older. Government plans such as Canada/ Quebec Pension Plan (CPP/QPP) and Old Age Security (OAS) do not qualify under the federal pension income splitting rules. Generally, income from non-registered investments will also not qualify. One exception is when the income is received from an annuity, including a Guaranteed Interest Contract (GIC) provided by an insurance company. A GIC from a life insurance company reports the interest accrued as annuity income which qualifies for the pension income credit at age 65. The interest element of a non-registered annuity contract (prescribed & non-prescribed) also qualifies for those age 65 or older.
See Tax Managed Strategy #14: The Pension Income Tax Credit Using an Insurance Company GIC (MK2071E) for more information on the pension income credit and insurance company GICs.
Income splitting options
Eligible income
You can split up to 50 per cent of eligible income, described above, with a spouse. Because of income tested benefits such as age credits, medical expenses and clawbacks on OAS, the optimum transfer may be less than 50 per cent. The examples below demonstrate that some analysis will be necessary each year to determine the optimal amount to split with your spouse in order to maximize the reduction in taxes and minimize the impact on income tested tax credits and benefits.
Canada/Quebec pension plans
Although not part of the Federal initiative with respect to pension income splitting, these government plans already allow spouses who are at least 60 years of age to share up to 50 per cent of the benefits earned while you were living together.
Spousal RRSPs
Contributing to a spousal RRSP can also result in tax savings. Under the pension income splitting rules, eligible income can only be split at age 65 or older. However, spousal RRSPs provide income splitting at any age and are not restricted to 50 per cent. Also, if your spouse is younger, the income can be delayed until the year after your spouse reaches age 71.
Following are two examples taking into account tax credits for the basic personal exemption, age credit and pension income credit, where applicable.
Example 1:
Both spouses are age 65 or older. The maximum benefit occurs by splitting just enough income to fully utilize the lower tax brackets and avoid an OAS clawback for Spouse 2.
Example 2:
Spouse 1 is 65 or older and spouse 2 is between age 60 and 65. A full 50 per cent split can maximize the tax benefits since no OAS clawbacks or age credits apply to spouse 2 and can eliminate the OAS clawback for spouse 1.
Ideal candidates
- Those age 65 or who are currently receiving income directly from a pension plan
- Those who have a spouse in a lower tax bracket
Take action
- Identify the income eligible for splitting
- Determine, with your tax preparer, the amount to be taxable to your spouse
- Make an election on your tax return
Investment options available through Manulife
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Manulife Investments GIC can be an ideal solution for conservative investors looking to help grow their wealth but who are also concerned about minimizing risk..
Important disclosure
1 Includes a spouse or common-law partner as defined by the Income Tax Act (Canada). 2 Taxes owing are calculated using graduated rates for the province of British Columbia taking into account the Basic Personal Exemption and the Pension Income Credit ($351) if applicable. Generally others will also apply. 3 The Age Credit is $1,315 less clawbacks. 4 Even though under age 65, Spouse 2 now has a Pension Income Credit on the transferred Company pension income.
The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. Mutual Funds: Manulife Funds are managed by Manulife Investments, a division of Manulife Asset Management Limited. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Segregated Funds: Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value. Manulife Investments is a division of The Manufacturers Life Insurance Company. The Manufacturers Life Insurance Company is the issuer of all Manulife Investments Annuities, Manulife segregated fund contracts and the Manulife Investments Guaranteed Interest Contract (GIC), and is the guarantor of any guarantee provisions therein. Manulife, the Block Design, the Four Cube Design and Strong Reliable Trustworthy Forward-thinking are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.
MK2070E 05/17