Potential postal disruption. Prepare for possible mail delays due to Canada Post labour negotiations. You can use our mobile app or log in to my Sun Life to submit claims and/or check on your investments.
Numerous strategies are available for retirees with a spouse or common-law partner (CLP) to minimize tax in retirement.
This article focuses on key strategies that may be the easiest for retirees to implement. As always, check with your financial advisor to see if these strategies are the best ones for you before you act on anything we’ve covered below.
Canada Pension Plan (CPP) and Québec Pension Plan (QPP) pension sharing
An individual can choose to start receiving their CPP or QPP retirement pension as early as age 60, or they can choose to defer receiving CPP until age 70 or QPP until age 72. Once you apply for or start receiving your CPP or QPP, you have the option to share it with your spouse or CLP with whom you reside. The amount that can be shared is based on the number of months you lived together during the contributory period. This strategy can work well when one spouse has more taxable income in retirement than the other.
There are two ways to share a CPP/QPP pension.
Either you or your spouse/CLP can apply for pension sharing online. Once the pension sharing application is approved, pension sharing will start, and:
It’s important to note that the pension-sharing arrangement can’t be back dated, but it can be stopped at a future date, if you wish.
Pension income splitting
Pension income splitting is available for individuals with a spouse/CLP who:
You can split your eligible pension income with your spouse or common-law partner, regardless of their age if the above conditions are met. A joint election (T1032 Joint Election to Split Pension Income) must be filed, annually, with your tax return to facilitate the splitting of eligible pension income. Note that only one joint election can be made in a tax year. So, if both you and your spouse/CLP have eligible pension income, you’ll need to decide who will be transferring their amount and who will be receiving the amount from an income tax perspective.
While CPP/QPP pension sharing will result in an immediate change in your cash flow, pension income splitting doesn’t. Pension income splitting is on paper, only. It’s an option available when you and/or your spouse/CLP file their annual tax return and can help reduce your overall household tax bill.
Eligible pension income
Various types of income are considered eligible pension income for income tax purposes. There are a few types of income that qualify as eligible pension income before you’ve attained the age of 65. The most common source of eligible pension income before age 65 are payments from a registered employer pension plan.
Once you’ve reached the age of 65, many other types of income will qualify, including:
In addition to the benefits of pension income splitting noted above, having eligible pension income allows an individual to claim the pension income amount. This is a Federal non-refundable tax credit worth up to $300 in tax savings (15% on up to $2,000 of eligible pension income). With pension income splitting, there’s the potential for both you and your spouse/CLP to claim the credit. Some provinces/territories in Canada also provide a similar non-refundable tax credit, which can increase tax savings.
Creating eligible pension income
If you don’t have any eligible pension income at age 65, you can create it. And you don’t have to start drawing on your registered accounts (e.g., RRSP or RRIF) to do it. It’s easy to implement and can be tax efficient.
Using your non-registered assets, you can purchase a payout annuity. This insurance contract provides guaranteed payments for life or for a fixed term. There are three parties to the contract – an owner, an annuitant and a beneficiary. A beneficiary doesn’t need to be named.
Annuity payments have two components:
As noted above, the interest component of the annuity payments qualifies as eligible pension income. As a result, you’ve created the opportunity to take advantage of the two key tax strategies mentioned above:
As well, if conditions are met, the annuity can qualify for prescribed taxation. With prescribed taxation, the interest that’s taxable to you is the same throughout the term of the contract. This provides you with certainty regarding the amount that will be included in your income for tax purposes throughout the term of the contract.
It is easy to put in place. An annuity quote is readily available for your consideration.
Age amount credit
One other tax provision to be aware of is the age amount credit (2025: Federal $9,028, other amounts are available for other jurisdictions). Like the pension income amount credit, it’s a non-refundable tax credit at 15% at the Federal level. A few numbers to be aware of relating to your access to the Federal age amount credit:
You can potentially safeguard your access to this credit through pension income splitting. With the option to split your pension income with a spouse or common-law partner, it may provide you with the opportunity to retain access to this credit, thereby safeguarding it.
As outlined above, there are several strategies available to you to minimize your taxes in your retirement years. Speak with your advisor and a qualified tax advisor for assistance to implement these strategies.
To learn more about pension income splitting, please visit Canada Revenue Agency (CRA) website.
Information contained in this article is provided for information purposes only. Its not intended to provide or be a substitute for professional, financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard. It also does not constitute a specific offer to buy and/or sell securities. You should always consult your financial advisor or tax specialist before undertaking any of the strategies discussed in this article to ensure that all elements and your personal circumstances are taken into consideration in developing your individual financial plan. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy and SLGI Asset Management Inc. disclaims any responsibility for any loss that may arise as a result of the use of the strategies discussed.
SLGI Asset Management Inc. is the investment manager of the Sun Life family of mutual funds. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund’s prospectus. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
Sun Life Assurance Company of Canada is the issuer of accumulation annuities (insurance GICs), payout annuities and individual variable annuity contracts (segregated fund contracts). Any amount that is allocated to a segregated fund is invested at the risk of the contract owner and may increase or decrease in value. Sun Life Financial Trust Inc. is the issuer of guaranteed investment certificates.
Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada and Sun Life Financial Trust Inc. all of which are members of the Sun Life group of companies.
