Can I split my income?

The new pension-income splitting provisions for senior Canadians have now been passed and will take effect for 2007. According to the government, income splitting will provide more than $1 billion in tax relief annually for older Canadians. It could make a significant impact on tax payable for eligible Canadians.

The provisions will allow taxpayers with eligible pension income to split up to 50 per cent with a spouse or common-law partner. When there is one spouse with very little income, the tax savings will be substantial. For higher-income taxpayers, it could also result in a reduced clawback of Old Age Security benefits and the age amount.

The first step is to determine if you are eligible for income splitting. You need to meet the government’s definition of a pensioner. This means you lived in Canada at the end of 2007 or in the case of someone who died during the year, was resident in Canada immediately before death. You also need to have received income eligible for the pension income amount during 2007.

The next step is to determine whether your spouse or common-law partner meets the definition of a pension transferee. Generally, it is sufficient if they were your spouse or common-law partner at any time during 2007. However, they will not qualify if you were living apart at the end of 2007 due to a breakdown of your relationship and the period of separation lasts 90 days or more. They must also have resided in Canada at the end of 2007 or, if they are now deceased, immediately before death.

If these requirements are met, you can split eligible pension income. Basically, this is any type of income that qualifies for the pension income amount. Regardless of how old you are, it includes most periodic pensions and superannuation payments, including foreign pensions (with the notable exception of income from a U.S. Individual Retirement Account). If you 65 or older at the end of the year, it also includes annuities and payments from a Registered Retirement Income Fund (RRIF). If you are under 65, these types of payments will also qualify if you are receiving them due to the death of a previous spouse or common-law partner.

The list of eligible pension income does not include Old Age Security payments, Canada Pension Plan benefits, retiring allowances, death benefits or lump sum withdrawals from your RRSP. However, is important to note that splitting Canada Pension Plan with a spouse or common-law partner may be possible through Human Resources and Social Development Canada.

For seniors without eligible pension income to split, there are a couple of options to consider. If you are 65 or older at the end of the year, but not yet 72, you may want to convert some of your RRSP funds to a RRIF. Any amounts you withdraw from your RRIF will then qualify as eligible pension income. Another strategy may be to convert some of your investment portfolio to an annuity or related instrument to take advantage of income splitting. It is important to consult a financial professional before making any decisions about your retirement income.

If you want to take advantage of the pension-income-splitting provisions, the Canada Revenue Agency (CRA) will require both you and your spouse or common-law partner to file new Form T1032, Joint Election to Split Pension Income with your 2007 income tax return. This form should be available by January of 2008.

It may be tempting to call your former employer or pension plan to ask about splitting income at the source. However, this is not allowed under the government’s rules so it will give you an incentive to get your tax return prepared as soon as possible.

This article provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this bulletin can be accepted by H&R Block Canada, Inc.

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