As we approach the income tax filing deadline for 2018, much of the story is already in the books. Your income for the year is known, the RRSP deadline has passed and money spent on deductible expenses has been recorded. There are still, however, a couple of choices you can make that will affect your total tax bill for 2018 – and one of them is income splitting.
The Canadian tax system is progressive: The more you earn, the more you pay. One of the means to pay less tax is to split your income with lower-earning family members, commonly referred to as income splitting. There are many different situations where income splitting can be used, so let’s consider a few examples that work differently.
Splitting employer’s pension
You have the ability to split the income from your employer’s pension plan with your spouse. This is limited to 50% of the amount received, but you can choose a lower amount if necessary. You can change the allocation each year, so this is a very flexible option and you can consider how all other parts of your situation played out for the year before you make this allocation.
Splitting RRIF income
Once you have reached age 65, the income you are withdrawing from your RRIF is eligible to be split as well. It is important to note that withdrawals from an RRSP, or RRIF income prior to age 65 is not eligible to be split.
Splitting Canada Pension Plan
CPP is eligible to be shared but not split. I know that sounds odd, but here is the difference. You can apply to share your CPP with your spouse and once approved, the pension amounts will be adjusted and paid out accordingly. The amount that is shared is pre-determined based on the number of years you and your spouse have lived together. You cannot split your CPP with your spouse when you are filing your return, as you have to report the amount you’ve received. In other words, whereas your employer’s pension and RRIF income can be split by between 0% and 50% year to year, CPP sharing is done at a pre-determined percentage that’s consistent for every year it is shared. If you have applied to share your CPP benefits, the tax slips will reflect that for reporting on your tax return.
Although spousal RRSPs were much more popular before changes to the tax act in 2007, many people have these accounts. The theory was that the higher income spouse could contribute to an RRSP in the name of the lower income earner. Once two full calendar years have passed from the last contribution, withdrawals are taxed in the hands of the account holder. This is not something that can be done when filing your tax return, as it must be withdrawn from the proper account.
These are just a few points on income splitting you might consider when filing your taxes. If you have any specific questions, consult a qualified tax specialist to ensure you only pay the tax you are required to pay!
Colin White, CPA, CMA, CFP®, CIM® is a Portfolio Manager with HollisWealth®, a division of Industrial Alliance Securities Inc., which is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. The opinions expressed herein are those of Mr. White alone and may not be aligned with the opinions and values of Industrial Alliance Securities Inc. or any of its affiliated companies.