A
t a glance
Helping You Understand Financial Planning and Investments
New income-splitting rules in retirement
– still a role for the spousal RRSP
Last October, the federal government announced a major change to
how your pension income in retirement may be taxed. Spouses
receiving pension income can now shift up to 50 per cent of this
income from one to the other to minimize the overall income taxes
they pay.
New rules can save you money
Shifting taxable income from a higher-income
spouse to a lower-income spouse – often referred
to as income splitting – is a significant tax saver,
as a couple receiving two smaller incomes at
retirement is taxed at a lower rate than one person
receiving all of the household income.
How significant are the savings? Here’s an example.
If a couple has one spouse earning $60,000 in
pension income, and the other earning no
income, the spouse with the pension income
could pay about $14,000 in federal and provincial
income tax.
But if this income is split between two spouses
at $30,000 each, it can attract taxes of about
$10,000 – a total tax savings of $4,000 each
year (these figures will vary by province
because of differences in provincial tax rates).
The catch is that the new rules apply only to
income that’s eligible for the pension tax credit.
So if you’re age 65 or older, this includes
income from:
■ pension plans
■ registered retirement income funds (RRIFs)
■ life income funds (LIFs)
■ locked in retirement income funds (LRIFs)
■ annuities purchased from RRSP or deferred
profit sharing plan assets.
If you are under age 65, the new income splitting
rules apply only to income from pension plans,
and some forms of annuity income.
Continued
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A
t a glance
Helping You Understand Financial Planning and Investments
The continuing role of spousal RRSPs
Spousal RRSPs in action
The traditional way of splitting retirement income in the past will
still have a potential role to play since the new income splitting
rules apply only to income eligible for the pension tax credit, and
not to other income you may have in retirement, such as nonregistered investments or rental income.
To recap on how spousal RRSPs work,
when you contribute to a spousal RRSP,
you get an immediate tax deduction, but
the contributions are invested and
controlled by your spouse. At retirement,
when the spousal RRSP is converted to
a RRIF or annuity, the income received
is taxed in your spouse’s name, and
usually at a lower tax rate.
For this reason, you should still consider the potential benefits of
a spousal RRSP used in combination with the new income-splitting
rules. A spousal RRSP may be a good tax-saving strategy for you if:
■ you expect your spouse to be in a lower tax bracket
during retirement
■ you expect to have a significant amount of investment,
rental, or other non-pension income in retirement.
In addition, your ability to split income before age 65 is limited
to income from a registered pension plan. This means that if you
retire at age 60, and are relying on income from a RRIF for example,
you will not be able to split this income with a spouse until
you are age 65.
If you plan on retiring before age 65, setting up and contributing
to a spousal RRSP today can be an excellent way to enjoy incomesplitting benefits in your early retirement years before the full
income-splitting rules apply to you.
Income split another way – contribute
to an RESP
Don’t forget – a spousal RRSP isn’t the only way you can split
income and lower your family’s tax bill. If your child is likely to
pursue post-secondary education, a Registered Educations Savings
Plan (RESP) can be a valuable income-splitting tool. You can
contribute up to $4,000 per year for each child, to a lifetime
maximum of $42,000 for each child.
While your contributions aren’t tax-deductible, all investment
earnings within the plan accumulate tax-deferred. When the money
is withdrawn from the RESP to pay for post-secondary education
costs, it’s included in your child’s taxable income, not yours.
Usually, that means there’s little or no tax to pay.
In addition, the Canada Education Savings Grant program will
match 20 per cent of RESP contributions per child each year to
a maximum of $400 per year.
Keep in mind, though, that spousal
RRSPs are designed with retirement in
mind. If your spouse withdraws funds
from the RRSP in the year you make
any contribution or the previous two
calendar years, that income will be
attributed back to you and included in
your taxable income.
The only exception is for Home Buyers’
Plan and Lifelong Learning Plan
withdrawals. A first-time home buyer
or individual pursuing post-secondary
education may be able to withdraw
funds from a spousal RRSP to fund
these expenses. While the amounts
must be paid back over time (by
the spousal RRSP planholder, not
the contributor), the spousal RRSP
attribution rules do not apply to these
withdrawals.
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If you have a general question or suggestion about this newsletter,
please send an e-mail to can_pencontrol@sunlife.com or write
to At a Glance Newsletter, Group Retirement Services
Marketing, Sun Life Financial, 225 King Street West, 14th floor,
Toronto, ON M5V 3C5.
Group retirement services are provided by Sun Life Assurance
Company of Canada, a member of the Sun Life Financial group
of companies. © 2007, Sun Life Financial. All rights reserved.