Learning about the Federal budget every year can save you tax dollars every year.  If you are earning income from a pension plan and having tax taken off at source, you may be paying too much tax.

Tim from Windsor, a retired Fireman has a pension plan that deducts tax based on the pension he receives.  Christine, his spouse, does not have any income.  Tim can split as much as 50% of his pension income with Christine this year, lowering his annual income tax bill by as much as 30% on the split portion of his pension plan.  Since Tim is having tax withheld by his pension plan at his income bracket and not the combined income bracket, he will be due for a tax refund in April, unless he asks the pension plan to consider lowering the amount of tax taken at source.  This would increase Tim and Christine’s cash flow today instead of in April. There are no age restrictions, since Christine is younger than Tim.  Christine’s tax return will show income and Tim’s will reduce the income. This may also offer the Old Age pension claw-back for taxes on high-income retirees over 65.  It may also affect non-refundable tax credits when they do their tax returns.  The pension credit for Tim is available on the first $2000 of pension income. This will double the credit since Christine will have half of Tim’s pension income and will also qualify for the $2000 pension income credit.

For individuals aged 65 and over the pension splitting applies for benefits from a registered pension plan, RRIF, or registered annuity.  If you are under age 65 it applies to benefits from a registered pension plan or certain amounts received as a result of the death of a spouse.  Check with your financial advisor, tax professional, and pension office to see if you might increase your cash flow today.

Avoid Excessive Taxation

What will you do with extra income?  Mrs. Jones from St. Clair Beach emailed me an interesting question.  She asked if she should convert some of her RRSPs into a RRIF in order to take advantage of the pension-income credit and to get some tax-free money out of her RRSP.  I answered with a question.  How old are you?

Mrs. Jones is 68 years old.  She could have started taking money out tax-free at age 65; however, she can start this year.  Here’s how it works.  The Income Tax Act allows for a $2000 pension income credit per person per year.  To qualify for the credit, you need to have pension income excluding Canada Pension Plan. And Old Age Security.  This would be income from a pension plan.  If you do not have a pension plan, then you can set up income from a RRIF to qualify for the credit.  Mrs. Jones transferred enough money from one of her RRSPs to give her the $2000 per year, tax-free, to which she is entitled—until she turns age 71. If she had started when she was 65, she would have been able to get more tax-free money out of her RRSP.

A retired couple with no pensions can take out $4000 per year tax-free from the RRSPs, as long as they convert it to RRIFs because it must be RRIF income in order to qualify for the pension-income credit. This will give Mrs. Jones $2000 more tax-free dollars to spend, so her neighbours will have a tougher time keeping up.