Within a couple, the income of the spouses is not always equal in retirement. Here’s how to rebalance the amounts and do well from a tax perspective.
Our progressive tax system means that the higher the income, the higher the tax bill will be, a rule that also applies to retirement income. “For example, if we base ourselves on current tax tables, on an annual income of $100,000, the taxpayer will have to pay approximately 26 to 27% to the tax authorities, or approximately $27,000,” explains Simon Houle, financial planner for the Onyx Group affiliated with IA Private Wealth Management and secretary-treasurer of the ÉducÉpargne organization.
On the other hand, if each member of the couple receives an income of $50,000, the tax bill will be $9,000 each (18%) for a total of $18,000, or $9,000 less!
This is why the ideal is to balance income between spouses in order to reduce the tax impact.
Spousal RRSP
This strategy must be put in place before retirement. It consists, for the person who earns the highest income, of contributing amounts to their spouse’s RRSP.
The person who makes the contribution will benefit from the tax deduction even if the amounts paid into the RRSP now belong to the spouse.
“Please note, this money cannot be withdrawn from the RRSP for a period of approximately two years – three December 31st must have elapsed since the contribution – otherwise it is the contributing spouse who will pay the tax and not the one who will withdrawal,” warns Simon Houle.
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What happens in the event of separation? If the couple is married, the family assets are shared between the spouses, in particular RRSPs. However, this is not the case for people in common-law relationships. “If the couple separates, the person will keep the contributions even if they were paid by their spouse. To protect yourself, you can prepare a cohabitation agreement providing for who keeps what,” underlines the financial planner.
Divide the QPP
This strategy can be applied if both spouses are at least 60 years old. It consists of combining the two retirement incomes from the Quebec Pension Plan (QPP) and dividing it between them. In other words, part of the retirement pension of one spouse is received by the other. The couple can be married, civilly united or in a common-law relationship.
In this way, the person with the highest income will see their tax bill reduced, because part of their pension will be added to their spouse’s income. Ultimately, the total tax will likely be lower.
“You should know that sharing is not necessarily done equally, but is calculated based on the period of living together,” explains Simon Houle.
Pension income splitting
It is also possible to split up to 50% of income from an employer pension fund, a RRIF or a LIF (life income fund) with your spouse from the age of 65 years. “This is an accounting entry, the splitting is carried out only at the tax level,” underlines Simon Houle. This means that the money is not paid into the spouse’s account and remains in that of the beneficiary. Please note that it is also possible to split the employer’s pension fund before age 65, but only at the federal level and not at the provincial level.
RRIF disbursement
After age 71, RRSPs must be transferred to a RRIF. From then on, you will have to withdraw a minimum amount, calculated according to your age. The older you get, the higher the percentage. If your spouse is younger, however, you will be able to withdraw the amount corresponding to their age and not yours. This at the same time reduces your income and therefore the tax.
Avoiding clawback of Old Age Security pension
Balancing income between spouses has another advantage: it allows the recovery tax on the Old Age Security (PSV) pension to be reduced or eliminated.
You should know that if your net income is above a certain threshold, you will have to partially or fully repay the PSV. Currently, this amount is $86,912 for the 2023 income year, but it increases gradually.
If applicable, we will therefore have to reimburse 15% of the amount exceeding this threshold. To do this, your monthly PSV will be reduced in order to take this recovery tax into account. Note that the calculation is done each year based on income earned. Reducing your income also allows you to reduce the recovery tax, or even avoid it.