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Dale Jackson

Personal Finance Columnist, Payback Time


With 2016 drawing to a close, tax experts are advising Canadian couples to think about income splitting.

Strategic tax planning may not be the sexiest topic, but the idea of saving thousands of dollars should capture anyone’s attention.

Most retirees live on a fixed income but shifting some of it to a spouse or common-law partner could result in tax savings on three levels.

First, suppose one spouse is drawing pension income in a 30 per cent tax bracket and the lower-income spouse is drawing income in a 20 per cent tax bracket. Shifting some of that income to the lower-income spouse will allow it to be taxed at the lower rate.

Second, capping the taxable income of a higher income spouse could prevent the Canada Revenue Agency from clawing back Old Age Security (OAS) payments. Pensioners can no longer draw OAS once their income hits a certain threshold.

Finally, pension income splitting can also allow both partners to claim the $2,000 pension income tax credit.

The amount of retirement income that can be split is limited to half, which means there are restrictions on partners with large income discrepancies. That’s why it’s important to initiate an income splitting strategy before retirement.

A spousal RRSP allows a higher-income spouse to contribute to the registered retirement savings plan of a lower-income spouse to balance things off. The higher-income spouse gets the tax break in a higher tax bracket and the lower-income spouse withdraws it in a lower tax bracket.

It’s important to know, though, that the higher-income spouse has the contribution deducted from their total RRSP contribution space.

The best way to avoid being overtaxed in retirement is much simpler but requires long-term planning: Don’t contribute too much to a single RRSP.

If it is growing too fast, divert your saving to a tax free savings account. TFSA withdrawals are never taxed – ever.