Many Canadians wonder if they can pay less tax in retirement by splitting their income with their spouse. The basic answer is yes, and here's how it works.
When you retire, you will likely have several sources of income, including pension income, income from investments, and possibly even income from part-time work. You can choose to split this income with your spouse for tax purposes.
Income splitting can be a great way to reduce your overall tax bill. It works by transferring income from a higher-earning spouse to a lower-earning spouse. This can help to reduce the amount of tax you pay.
There are a few rules to keep in mind when income splitting.
First, you can only split pension income with a spouse or common-law partner. You cannot split investment income, such as income from stocks, bonds, or mutual funds.
Second, you can only split income that is eligible for the pension income tax credit. This includes most types of pension income, such as income from a defined benefit pension plan or a Registered Retirement Income Fund (RRIF) but only after you have turned 65.
Third, you can only split income that you receive in the year you retire. You cannot split income that you receive in future years.
Fourth, the total amount of income that you and your spouse split cannot exceed your combined retirement income.
Finally, you need to file a tax return to claim the income splitting deduction.
If you have any questions about income splitting, be sure to speak to a qualified tax professional.
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