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 allows 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 how income can be moved between taxpayers within a family.
First, disable automatic pension income splitting. You can see the Pension Splitting column under Transfers on the Individual Planning pages. Click the gear icon in the section header.
Click Suspend Pension Income Splitting in the dialogue box.
Now you can effectively perform any pension income splitting strategy as you can shift taxable income from one spouse to another.
- Go to Scenario Setup -> Incomes.
- 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.
The Transfer to spouse column is on the Client's Planning page and Transfer from spouse on the Spouse's Planning page. 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.
