January 15, 2008
Pension income splitting
By W. Michael Thomas CFP, CLU, CH.F.C., R.F.P.
The pension income splitting initiative was introduced in the 2007 Budget and implemented by Bill C-52 on June 22, 2007. Here are the most frequently asked questions on the subject:
1. What is pension income splitting?
Canadian residents may allocate up to one-half of their income that qualifies for the existing pension income tax credit to their resident spouse (or common-law partner) for income tax purposes. Pension splitting affects the calculation of income and tax payable for both persons, so they must both agree to the allocation in their tax returns for the year in question. The amount allocated is deducted in determining the net income of the person who actually received the pension income. It is included in computing the net income of the spouse or common-law partner.
2. Who qualifies for pension income splitting?
A pension recipient and his or her spouse or common-law partner may elect to split the “eligible pension income” received in the year if:
3. What is “eligible pension income”?
The total of the following amounts received by the pensioner in the year are considered eligible pension income (these amounts also qualify for the pension income amount):
4. How do individuals elect to split eligible pension income?
To make a joint election in prescribed form, the new Form T1032, Joint Election to Split Pension Income, will need to be included with their income tax returns for the year on or before filing due date. The 2007 income tax return will include a new line for the pensioner to deduct the amount of pension allocated to the spouse or common-law partner. A new line will also be added for the spouse or common-law partner to report the allocated pension income.
5. Who will claim tax withheld at source from the eligible pension income?
The income tax that is withheld at source from the eligible pension income must be allocated from the pensioner to the spouse or common-law partner in the same proportion as the pension income is allocated.
6. Will pension income splitting affect the pension income amount?
The pensioner is able to claim whichever amount is less: $2,000 or the amount of his or her eligible pension income after excluding amounts allocated to their spouse or common-law partner. The spouse or common-law partner will claim whichever amount is less: $2,000 or the amount of pension income that is eligible for the pension income amount, including allocated pension income.
7. Does pension splitting affect the Goods and Services Tax/Harmonized Sales Tax (GST/HST) credit, Canada Child Tax Benefit (CCTB), and other federal or provincial benefits and tax credits?
Allocating pension income to a spouse or common-law partner reduces the pensioner’s net income and increases the spouse or common-law partner’s net income. As a result, benefits and tax credits based on the total of the net incomes of both spouses or common-law partners – such as the GST/HST credit, CCTB, and related provincial or territorial benefits – will not change as a result of pension splitting. However, pension splitting will affect any tax credits and benefits calculated by using one individual’s net income, such as the age amount, the spouse or common-law partner amount, and the repayment of Old Age Security benefits.
If you have any questions, please contact Michael Thomas at the address below.
W. Michael Thomas is a partner with The Investment Guild, an endorsed provider of the HortProtect Group Insurance Program, and a director of Ontario Horticultural Trades Foundation. The Investment Guild HortProtect 1-800-459-8990, 11 Allstate Parkway, Suite 100, Markham, Ont., L3R 9T8 website: www.hortprotect.com and e-mail: info@hortprotect.com.
The pension income splitting initiative was introduced in the 2007 Budget and implemented by Bill C-52 on June 22, 2007. Here are the most frequently asked questions on the subject:
1. What is pension income splitting?
Canadian residents may allocate up to one-half of their income that qualifies for the existing pension income tax credit to their resident spouse (or common-law partner) for income tax purposes. Pension splitting affects the calculation of income and tax payable for both persons, so they must both agree to the allocation in their tax returns for the year in question. The amount allocated is deducted in determining the net income of the person who actually received the pension income. It is included in computing the net income of the spouse or common-law partner.
2. Who qualifies for pension income splitting?
A pension recipient and his or her spouse or common-law partner may elect to split the “eligible pension income” received in the year if:
- Married or in a common-law partnership with each other in the year and are not, because of a breakdown in their marriage or common-law partnership, living separate and apart from each other at the end of the year and for a period of 90 days commencing in the year (a pensioner and his or her spouse or common-law partner will still be eligible to split pension income if living apart at the end of the year for medical, educational, or business reasons; rather than a breakdown in the marriage or common-law partnership
- Both are residents in Canada on December 31;
- Deceased in the year, resident in Canada on the date of death;
- Bankrupt in the year, resident in Canada on December 31 of the calendar year in which the tax year (pre- or post-bankruptcy) ends.
3. What is “eligible pension income”?
The total of the following amounts received by the pensioner in the year are considered eligible pension income (these amounts also qualify for the pension income amount):
- Taxable part of annuity payments from a superannuation or pension fund or plan;
- Received as a result of the death of a spouse or common-law partner, or if the pensioner is age 65 or older at the end of the year;
- annuity and registered retirement income fund (including life income fund) payments;
- Registered Retirement Savings Plan annuity payments.
4. How do individuals elect to split eligible pension income?
To make a joint election in prescribed form, the new Form T1032, Joint Election to Split Pension Income, will need to be included with their income tax returns for the year on or before filing due date. The 2007 income tax return will include a new line for the pensioner to deduct the amount of pension allocated to the spouse or common-law partner. A new line will also be added for the spouse or common-law partner to report the allocated pension income.
5. Who will claim tax withheld at source from the eligible pension income?
The income tax that is withheld at source from the eligible pension income must be allocated from the pensioner to the spouse or common-law partner in the same proportion as the pension income is allocated.
6. Will pension income splitting affect the pension income amount?
The pensioner is able to claim whichever amount is less: $2,000 or the amount of his or her eligible pension income after excluding amounts allocated to their spouse or common-law partner. The spouse or common-law partner will claim whichever amount is less: $2,000 or the amount of pension income that is eligible for the pension income amount, including allocated pension income.
7. Does pension splitting affect the Goods and Services Tax/Harmonized Sales Tax (GST/HST) credit, Canada Child Tax Benefit (CCTB), and other federal or provincial benefits and tax credits?
Allocating pension income to a spouse or common-law partner reduces the pensioner’s net income and increases the spouse or common-law partner’s net income. As a result, benefits and tax credits based on the total of the net incomes of both spouses or common-law partners – such as the GST/HST credit, CCTB, and related provincial or territorial benefits – will not change as a result of pension splitting. However, pension splitting will affect any tax credits and benefits calculated by using one individual’s net income, such as the age amount, the spouse or common-law partner amount, and the repayment of Old Age Security benefits.
If you have any questions, please contact Michael Thomas at the address below.
W. Michael Thomas is a partner with The Investment Guild, an endorsed provider of the HortProtect Group Insurance Program, and a director of Ontario Horticultural Trades Foundation. The Investment Guild HortProtect 1-800-459-8990, 11 Allstate Parkway, Suite 100, Markham, Ont., L3R 9T8 website: www.hortprotect.com and e-mail: info@hortprotect.com.