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Reporting Results of Pension Income Splitting

Posted by David Gobeil on

Pension income splitting allows any Canadian resident who receives income that qualifies for the pension income tax credit to allocate to their resident spouse or common-law partner up to one-half of that income (ITA 118(7) & (8)).

For income tax purposes, the amount allocated will be deducted in computing the income of the transferor (the person who actually received the pension income) and included in computing the income of the transferee (the person to whom some or all of the pension income is allocated).

In practice, the spouse or common-law partner who transfers/splits pension income would have been the recipient of the pension funds and have benefitted from the receipt. However, the spouse or common-law partner who has to report the additional pension income as a result of the split incurs an additional amount of tax, which without the pension income split would have been payable by the other spouse or common-law partner.

The pension income split may also change the amounts of the OAS Clawback, which is dependent upon the net income of the recipient. The Software examines two strategies: split pension income to equalize spouse/partner’s income and split income to preserve Old Age Security benefits.

The previous version of the software attributed the pension income to the recipient, but the additional tax to the other spouse or common-law partner who reported the additional pension income as taxable income.

This version attributes the pension income to the recipient, calculates the income tax that the recipient would pay without the pension income splitting, and then reduces this amount of income tax by the savings that result from the pension income splitting.

  PROJECTIONS OF RETIREMENT INCOMES

BASED UPON CURRENT SAVINGS

AS AT JANUARY 1, 2019

2036

Retirement funds from Bill / Age

74

 Employment & business income

$0

 Pension incomes

51,744

 Canada (Quebec) Pension Plan

17,687

 Old Age Security

10,129

 Clawback of Old Age Security

(5,182)

 Minimum RRIF withdrawal

55,501

 Income from tax-paid capital & CCPCs

8,967

   Taxable income

138,846

 Income taxes without pension income split

(31,993)

 Reduction in Income Taxes with Income Split

539

 Recovery (Loss) of OAS with Income Split

387

 Funds from (to) tax-paid capital

30,481

 Adjustments for tax-paid capital & CCPCs

(5,637)

   Retirement funds

$132,623


If you [View] [Projections of Income Tax during Retirement], you will see 2 schedules: Income Taxes during Retirement With Pension Income Splitting; followed by Income Taxes during Retirement Without Pension Income Splitting.


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