3 retirement income questions answered

Managing your retirement income in the most tax effective way is smart financial planning. In this post, we address three of the most common questions about structuring retirement income. These are the basic facts, but everyone’s situation is different. It’s always advisable to consult a tax professional before you decide on a course of action.

Can I benefit from the pension tax credit if I receive my pension before age 65?

Yes. The pension tax credit is available if you are 55 years of age or older. Generally, the first $2,000 of your eligible pension income would qualify for a federal 15% tax credit (provincial tax credits are also available). If you are under the age of 65, eligible pension income is restricted to income from a pension plan. In most cases, this restriction precludes individuals younger than 65 from benefiting from the pension tax credit.

If you are 65 or older, eligible pension income includes more options, such as annuity income from an RRSP or retirement income from a RRIF. A useful strategy would be to convert a portion of your RRSP to a RRIF if you are over 65 (but younger than 71), in order to benefit from the pension tax credit on the first $2,000 of income.

Can I contribute to a spousal RRSP if I am over 71?

It depends on the age of your spouse. If you are over 71, but your spouse is younger, you can still contribute to the spousal RRSP, even though you can no longer contribute to your own. In order to do so, you must have sufficient RRSP contribution room. The funds contributed to the spousal RRSP will be taxed to the spouse when they are withdrawn, subject to attribution rules. In order to avoid the RRSP withdrawals from being attributed to you and taxed in your hands, it is important that the spouse does not withdraw the funds from a spousal RRSP for 3 years after you make the contribution.

Can I use my private corporation to split income with my spouse if I am over 65?

The newly-enacted Tax On Split Income (“TOSI”) rules make income splitting through a private corporation very difficult. These rules result in an automatic application of top marginal tax rates to the “split” income received by an individual. However, there are numerous exceptions available. One of the more common exceptions is available to individuals who reached the age of 65 during the year. If you’ve reached the age of 65, you could pay a dividend to your spouse from a private corporation, without the application of TOSI and highest marginal rates.

The TOSI rules are extremely complex and could apply differently to each situation. Therefore, it is crucial to consult a tax professional before attempting income splitting strategies.

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