New for 2007 -- Pension income splitting

If you received annuity payments from a superannuation or pension fund or plan, or if you received annuity and registered retirement income fund (including life income fund) payments and Registered Retirement Savings Plan annuity payments as a result of the death of your spouse and you are older than 65 at the end of the year, you may be able to allocate up to one-half of the income from this pension to your spouse (or common-law partner) for on your income tax return.

The goal of this new tax measure is to offer an opportunity to senior couples to equalize their income and reduce the tax burden for the couple.

So how does pension-income splitting work? On the income tax return for 2007, the pensioner reports the whole amount as income and reports up to 50% of that amount as the elected split-income amount on his spouse's return. Then the amount being allocated to the spouse is deducted from his total income as the deduction for split-income amount. As Pension splitting affects the calculation of income and tax payable for both the pensioner and his or her spouse, they must both agree to the allocation in their tax returns each year a split is made. As proof of this agreement, they must sign and file the form T1032, Joint Election to Split Pension Income.

If taxes have been deducted from the pension at source, the amount of tax paid is also allocated to the spouse in the same portion.

Why go to the trouble of Pension splitting? Let's look at the example of John and Mary. John has a T4A reporting retirement pension of $30000 and tax paid of $6000, he may deduct up to $15000 as his split-income amount and report tax paid at source of $3000. His wife, Mary must then report $15000 as pension income and $3000 as tax deducted at source.

Let's assume Mary had no pension income other than Old Age Pension and Canada Pension. She may have interest or some other income but her taxable income is less than or similar to that of John. Now Mary and John can share the pension income appearing on the T4A, reduce John's taxable income and allow Mary the benefit of the pension income deduction which is now up to $2000.

The goal for most couples is to reduce their joint tax bill. Pension-splitting will certainly help do this for many seniors or others receiving income from a pension fund or plan.

Copyright Dr Tax-UFile.ca 2008