Income Splitting Options in Retirement

Benjamin Franklin once said “Nothing is more certain than death and taxes”. But when it comes to paying taxes, those with a common-law partner or married partner are simply better off. Paying less total income tax is not only possible, but a virtual guarantee because of the gifts granted by our government to encourage long term relationships.

There are six primary ways to save on taxes when you have a significant other. Let’s go through them one by one.

1. The Spousal RRSP: If your retirement assets and income look they will exceed your spouse’s, contribute to their RRSP by opening up a Spousal RRSP. You will still get the tax refund (it will still be considered a deduction against your income for tax purposes), but they will get the income generated by your contributions in retirement. And it’s your RRSP contribution room that will be used up – meaning a stay-at-home spouse can actually build up their RRSP through their partner’s contributions to their Spousal RRSP. A good thing.

2. Using your partner’s lower age to determine RRIF minimum withdrawals: One goal in retirement should be to allow the tax-deferral of assets to continue as long as possible. With Registered Retirement Income Funds (what most RRSPs will be converted to eventually), there is a minimum you must withdraw each year as taxable income. That minimum is based on your age, and it increases each year. The government allows you to use your younger spouse’s age to determine this percentage – another big save if you are a few years apart.

3. CPP income splitting: A couple is permitted to ‘assign’ their CPP pensions. This is a form of income-splitting that allows each partner to assign half of their CPP to the other. Again, if they are in different marginal tax brackets (because of their respective retirement income) this will save in taxes owing.

4. Property roll-over upon death: Upon one’s passing, there is a full accounting of assets owned, and everything is ‘deemed disposed’ at its fair market value. Tax may be owing on the growth in value since the purchase of property and investments held by the deceased. One way to avoid this tax bill is to roll-over all property to a surviving partner. It is a simple election on the final tax return and is one of the most significant tax deferrals available. And yes, it includes the family home, the cottage and investments of all kinds, including RRSPs/RRIFs.

5. RRIF and Pension income splitting: Income generated from an RRSP or RRIF after age 65 can be split evenly with a spouse, and so can the income from a defined benefit pension, at any age. However, it is important to note that if you plan on retiring before 65, RRSP/RRIF income cannot be split, nor can benefits from a defined contribution pension. This is why spousal RRSPs are still important for those who plan on retiring before 65.

6. Survivor Pensions: For those with a defined benefit pension at work, there is always (by law) a spousal survivor pension, that is available to the surviving spouse that ranges from 60% – 100% of the employee’s pension. Unless you as the receiver decide to forego it when the pension option is made, you will be guaranteed this survivor pension for life. A small CPP survivor pension is also available to the surviving spouse of a CPP recipient.

Taxes matter a lot in retirement – the ability to split income, share income, defer tax and roll-over assets is not only permitted, it is encouraged and can result in tens of thousands of dollars in tax savings. So get to know these strategies and do your best to even out income with your partner throughout retirement. There might be an extra trip a year made possible from the savings.

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