Did you know that when you retire, you can split your income with your spouse or common-law partner? Income splitting is the process of dividing family income between members to take advantage of lower tax brackets, deductions, and credits available to each family member. In the article below, we’ll walk you through the basics of splitting retirement income.

What is retirement income splitting?

The federal and provincial governments have come up with a way to reduce the tax burden on retired Canadian families. It allows individuals to split up to 50% of their eligible retirement income with their spouse, to counterbalance the challenges presented by managing and planning taxable retirement income. These strategies require agreement from both spouses, as they involve sharing only the tax bill, and not the amounts.
 

What types of income can be split?

Many types of income can be split when you reach 65:
  • Lifetime retirement benefits from a registered pension plan;
  • Lifetime annuity payments purchased from a pension plan, including a life income fund (LIF) or locked-in retirement income fund (LRIF);
  • Payments from a Registered Retirement Income Fund (RRIF) (any portion transferred to an RRSP or another RRIF, or used to purchase an annuity is not eligible);
  • RRIF payments on death of spouse;
  • Annuity payments from an RRSP, an RRIF, or a Deferred Profit Sharing Plan (DPSP);
  • Payments from a pooled registered pension plan (PRPP);
  • Income from non-registered annuities and insurance guaranteed investment certificates (GICs);
  • Payments from some foreign pension plans.

If you are under 65, you can still split some income:

  • Lifetime benefits from a registered pension plan (does not apply to the Quebec tax return, but this option is available for your federal return);
  • Lifetime annuity payments purchased from a retirement or pension plan (does not apply to the Quebec tax return, but this option is available for your federal return);
  • RRIF/RRSP/DPSP/CPP payments or annuity payments upon the death of a spouse (not applicable to the Quebec tax return, but the option is available for your federal return);
  • Payments from the Saskatchewan Pension Plan;
  • Payments from some foreign pension plans (does not apply to the Quebec tax return, but this option is available for your federal return).

Key items

We’ve put together a list of key items to remember if you decide to go ahead and split your income:

  • We’ve put together a list of key items to remember if you decide to go ahead and split your income:
  • You can have your previous tax returns amended, to recover any benefits of income splitting that you may have missed.
  • The splitting of Quebec’s provincial retirement pension, the RRQ, is handled differently: Rather than share only the tax bill, spouses benefit from a true division, and money is deposited into the spouse’s account. The retirement pension is not necessarily divided in equal shares; instead it is divided according to the length of time the couple has lived together.
    https://www.rrq.gouv.qc.ca/fr/retraite/rrq/calcul_rente/Pages/division_rr.aspx 

Income distribution strategy

Besides retirement income splitting, a strategy that comes into effect when money is disbursed, there are also fairly simple-to-apply income distribution strategies that also provide tax relief for the family during the accumulation phase. Their purpose is to reduce the tax burden while complying with tax laws, and with income attribution rules:

  1. The lower-income spouse can sell personal-use property (primary residence, motor vehicle, boat) to the spouse with higher taxable income, at fair market value. The lower-income spouse can then acquire income-generating assets without the attribution rules coming into play.
  2. Various child tax benefits can be direct deposited into an account in the name of the minor for whom the benefits are intended. Using a different account is preferable, in order to differentiate between income that remains subject to the attribution rules for federal tax purposes.
  3. Have the spouse with the higher income pay for family expenses, to give the spouse with the lower income some savings capacity, and to allow them to invest their personal income.
  4. Contribute to your spouse’s RRSP.

What are the attribution rules?  

These rules are designed to prevent abusive income splitting between family members when certain assets or income are provided for no consideration, or for less than fair market value.

To prevent the abuse of property-related income splitting, legislators have adopted attribution rules that apply to property income or capital gains resulting from certain transfers or loans between related individuals (such as the taxpayer’s spouse or child).

For example, attribution rules may apply when a person makes an interest-free or low-interest loan to a related adult (other than a spouse) and it is reasonable to conclude that the purpose of the loan is to reduce the lender’s tax burden.

Notes for businesses

Dividends to children

Some criteria differ for business owners to be able to quality.

Before 2018, paying dividends to a minor child was allowed but certain rules that restrict access to income splitting for children of business owners have since come into effect. Now, a child needs to work 20 hours a week at the company in order to be eligible for dividends.

Multiplication of the capital gains exemption

Arguably, income splitting is still possible for business owners thanks to the multiplication of the capital gains exemption for a trustee on the sale of company shares that qualify as QSBCS.*

There’s more than one trick to getting the most out of splitting your income. To learn more about creating your own income splitting strategy, or to get the financial support you need, feel free to contact or book an appointment with one of our advisors.