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Tax planning strategy for spouses with pension income

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You and your spouse can agree to split up to 50% of your eligible pension income, which can save substantial income taxes if divided optimally between the two spouses. This strategy is especially valuable if one spouse is in the highest tax bracket and the other spouse is in the lowest, and the high-bracket spouse has most of the pension income. That situation would mean that all of the income of the high-bracket spouse, including the pension income, is taxed at the highest possible rate. If you transfer 50% of this pension income to the lower-income spouse, then one half of the high-income spouse’s pension income will instead be taxed at the lowest possible rate, unless the transferred income pushes the low-income spouse into the next tax bracket. Even in such a case, the strategy is still beneficial when compared to just leaving all the pension income with the original high bracket spouse. If your spouse is 65 years of age, all of his or her pension income is eligible for splitting, and up to 50% of it can be transferred. If your spouse is not 65, only his or her income eligible for the $2,000 pension income credit is eligible for purposes of the income splitting election.

There are two possible benefits to splitting income. First, if you are in a lower tax bracket than your spouse, as a couple your tax will be lower overall. Secondly, if you are over 65, you may include the transferred income along with your own pension income in claiming the $2,000 pension income credit, thus increasing the credit if it was not at the maximum.

The election is made on form T1032, but the computation is complex to determine the optimal amount to transfer to result in the lowest possible amount of tax for the combined couple. Please contact Simkover and Associates at 905-943-4046 if you need further advice in relation to this topic.

Please contact us at 905-943-4046 if you need further assistance or accounting services in the coming months. Click here for additional contact information

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