Pension Income Splitting (Manual)
This article details the manual method of performing pension income splitting. For details on automated pension income splitting with Snap, please refer to the article Pension Income Splitting (Automatic).
Pension income splitting is a mechanism allowing the transfer of taxable eligible pension income from one spouse to another to decrease their joint tax liability. The pensioner is the individual who receives eligible pension income and who elects to allocate part of that income to his or her spouse or common-law partner called the pension transferee.
Pension income splitting in Canada has several legislative provisions, attribution rules, and anti-avoidance measures limiting the ways the income can be moved between taxpayers within a family.
Snap allows the planner to perform any income splitting strategy, without implementing those different provisions individually (as they may change year by year).
You can effectively perform any pension income splitting strategy using Snap as you can shift any taxable income from one spouse to another.
- Go to the Scenario Setup -> Income page.
- Click Add Income to add a new income stream.
- Enter "Transfer to spouse" in the Description column (or something equally meaningful to you).
- Enter $0 as the Amount and adjust it later only in the specific years on the Planning pages.
- Change the Taxable column to 'Yes'.
Go to the spouse's Income page and perform similar steps:
- Click Add Income to add a new income stream.
- Enter "Transfer from spouse" in the Description field (or something equally meaningful to you).
- Enter $0 as the Amount and adjust it later only in the specific years on the Planning page.
- Change the Taxable column to 'Yes'.
- Go back to the Planning Page.
When you are on the Planning page, you will see the column called Transfer to spouse in the client scenario and Transfer from spouse in the spouse scenario. Make the respective edits, in this case, we shifted a negative $12,800 from the client to the spouse starting in the appropriate year. You can adjust the value depending on the eligible pension income each year.
Make the respective edits for the spouse, in this case, we "received" a positive $12,800 from the spouse starting the same year.
The screenshots below show their situation before the pension splitting (top) and AFTER the pension splitting (bottom). John was able to decrease his marginal 24.15% tax rate to 20.05% and Jane kept the same marginal tax rate.
The pension income splitting may result in minimizing the total tax liability for both spouses (although it may not always result in maximizing their terminal estate value).
For that reason, you will want to review the Estate Summary section on the Combined page and inspect the numbers. This will help you to better understand if the pension splitting strategy leads to (or detracts from) maximizing your client's after-tax wealth.
In this scenario, the difference in the final Estate After Tax indicates that pension splitting was indeed an effective strategy to minimize their tax liability and maximize the value of their estate.
