If your spouse is a beneficiary of a pension plan did you know that you can allocate some of that income to you?
OK, so why would you want to do that?! If you have a lower marginal tax rate then it may be beneficial to put the income on your tax return and pay the tax at a lower rate. You can split up to half of the pension income and only with a spouse or common law partner. The really neat thing is that you don't have to do it every year and you don't have to always use the same percentage to split. You can vary these amounts annually....or not even split at all.
This may be a huge savings, especially if one partner has a pension and the other doesn't have much retirement income. Leveling the playing ground does two things...it lowers the income level of the spouse that has most of the income and then it increases the income level of the spouse who has the lower income. In effect this lowers the marginal tax rate of the higher income spouse and increases the marginal tax rate of the lower income spouse.
A practical application would be ~ Mary has over $150,000 in pension income and her husband has no income. Her combined marginal tax rate is 46.41% and her husbands is zero. If she splits her pension income with her husband, effectively earning them $75,000 each which would put them both in the 35.39% tax bracket. In scenario #1 the taxes owing would be $69,615 and in the second scenario the tax payable would be $53,085. That's a difference of $16,530!!!
Of course, I over-simplified the answer and there is much more to consider when doing your taxes. For example, there is an additional benefit of both spouses partaking in the pension tax credit, amongst other tax issues..........however............it can definitely be a benefit to look at the pension splitting option for those with pensions or for those with income streams from retirement plans once they are both 65 years of age.
Keep in mind that the analysis should be done as this does not always work to everyone's benefit. It must be considered on an individual basis.
