If a pensioner is over 65, they can elect to split up to 50% of their pension income with their spouse on their tax return. The most common types of pension available to split include:
- RRIF and LIF payments.
- Life annuity payments from a pension plan.
- Annuity payments from an RRSP (not withdrawals).
- Pooled Registered Pension Plan payments.
- Registered Pension Plan benefits.
- Foreign pension plan payments (including any US Social Security payments not deducted from taxable income).
- Most payments from the sources above if they result from the death of a spouse.
When a pension is split between two spouses, the amount to be split is deducted from the income of the transferor and included in the income of the transferee. In many cases, this will move taxable income from a higher marginal rate to a lower rate, resulting in tax savings for a couple.
While the maximum eligible transfer is 50% of the eligible pensions, the optimal transfer rate may be less than that taking into account a couple's circumstances each year.
While CPP retirement benefits do not qualify for the Pension Income Splitting provision on the tax return, couples who are both receiving CPP retirement benefits can apply to Service Canada to have their benefits averaged between them, which would achieve similar results.
This article originally appeared in Southwestern Tax Service's February Newsletter: https://conta.cc/3rGqCdH
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