To Split or Not to Split
To Split or not to Split…That is the question.
Income Splitting Strategies
So what is Income Splitting, and who is eligible to quality for the benefit?
Income Splitting is a way for families to split up their income so that if one spouse earns more than the other, the higher-earning spouse can allocate some of their income to their lower-earning spouse’s tax return. Since our tax system has graduated tax brackets, Income splitting is a great strategy to pay less household tax, and keep more money in your pocket!
To benefit, you must have a child who:
- is under 18 at the end of the year, and
- ordinarily resides with you or your spouse or common-law partner throughout the year
The combined federal tax reduction is equal to what you would save if you were to transfer to your lower-income spouse the lesser of:
- $50,000, and
- ½ x (your taxable income – your spouse’s taxable income)
The resulting savings can be claimed by either spouse in the form of a federal non-refundable tax credit, to a maximum of $2,000. As a result, this measure can reduce your federal taxes only – not your provincial or territorial income tax. *
Pension Splitting
Another more traditional form of income splitting is the ability to split up to half of your pension income with your spouse. Any pension income that qualifies for the $2,000 federal pension income credit also qualifies to be split. Specifically, this would include annuity-type payments from a Registered Pension Plan (RPP), regardless of age, and also includes Registered Retirement Income Fund (RRIF) or Life Income Fund (LIF) withdrawals upon reaching age 65.*
Spousal RRSPs (RRIFs)
If you think that, upon retirement, you will have a higher income or have accumulated more retirement assets than your spouse, it may be beneficial for you to contribute to a spousal RRSP. A spousal RRSP is an RRSP to which you make the contributions, but of which your spouse is the annuitant (owner) of the plan. It is often used to accomplish post-retirement income splitting since withdrawn funds are taxed in your spouse’s (the annuitant’s) hands instead of yours (the contributor’s). A spousal RRIF is the continuation of a spousal RRSP. *
* http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns409-485/423-eng.html
