The federal government and all provinces allow a tax credit based on pension income received. The federal tax credit is 15 per cent of the lesser of $2,000 and the eligible pension income of the individual, while provincial percentages and limits vary.
The Canada Pension Plan (CPP) provides a number of benefits, the most significant of which is the retirement pension that forms an integral part of most Canadians’ financial plans for retirement. The Quebec Pension Plan (QPP) provides parallel benefits for Quebec residents. Every contributor to these government-sponsored pension plans will eventually need to make important decisions about when to begin receiving these valuable benefits.
One of the more popular tax planning strategies is “income splitting.” To the extent income can be shifted within a family unit from a higher income earner to a lower income earner, less income tax is paid and more after-tax income is retained within the family unit.
Individuals in receipt of eligible pension income can allocate or split up to 50% of the income with their spouse or common-law partner, and the allocated income is reported as the spouse’s taxable income. This allows the shifting of income from a higher-income spouse to a lower-income spouse, enabling the couple to reduce their combined income tax liability and increase cash flow during retirement.
