Reducing Taxes Through Income Splitting

Effective tax planning in retirement can help you keep more of your hard-earned savings. By organizing assets before retirement and income sources during retirement, you can minimize taxes and optimize cash flow. Let’s look at four ways to split income when one spouse or common-law partner has income in a higher tax bracket than the other.

In Canada, income is taxed in brackets, so that if two people both earn the same amount of taxable income, they will pay the same amount of taxes. However, if one person earns more than the other, there’s a chance that some of their income will be in a higher tax bracket. The goal of income splitting is to allocate income from the higher-income partner to the lower-income partner, which can potentially lower the couple’s combined tax burden.

CPP Income Splitting

One straightforward income-splitting method is through the Canada Pension Plan (CPP). Retirees can assign up to 50% of their CPP income to their partner. If both retirees split their CPP, then they will receive equal CPP income. If one partner has a higher taxable income, they can split up to 50% to the person with a lower income, moving toward equalizing their taxable income. The decision of whether or not to split CPP and to what extent must be made at the time that you apply to start receiving CPP payments.

Pension Income Splitting

Eligible pension income can also be split between spouses or common-law partners. By shifting a portion of pension income to the lower-income spouse’s tax return, couples may be able to reduce their overall taxes. This option is only available to individuals receiving eligible pension income, such as income from a workplace pension or from a Registered Retirement Income Fund (RRIF) starting at age 65. Pension income splitting can be done entirely on your tax return, and can be changed from year to year, as it benefits you.

Spousal Investment Strategies

When planning ahead for retirement, you can contribute to a spousal RRSP or directly to your spouse’s TFSAs to equalize assets between spouses. Contributing to a spousal RRSP allows a higher-income spouse to fund the retirement of a lower-income spouse, resulting in a greater ability to equalize taxable withdrawals in retirement. TFSAs are especially useful for couples, as they allow both partners to grow their savings tax-free and withdraw funds without triggering taxes, which offers flexibility in retirement.

Advanced Income Splitting Strategies

For those with more complex needs, advanced income-splitting strategies include options such as: prescribed rate loans, spousal trusts, and family trusts. These approaches require careful planning and professional advice, as they come with specific rules and potential setup costs. These strategies may suit individuals looking to transfer wealth while managing taxes across multiple family members. If you think you might benefit from one of these strategies, please call us and speak with your tax and legal advisors.

Retirement tax planning doesn’t have to be complicated, but a strategic approach can help you get the most from your income. By using tax-efficient accounts and income-splitting strategies, and by integrating tax considerations into every aspect of your financial plan, you can achieve a steady retirement income while minimizing taxes.

You can read more articles about tax-efficient strategies and other financial topics. If you have questions about this article or would like a conversation about how these ideas apply to your unique situation, call us at 403-290-0940.