Reducing your tax burden may be of utmost importance to you for better retirement planning. If you earn a high amount, you can split your income in Canada. The best part is that there are many income-splitting options in this country.
You use pension splitting to benefit from income splitting before retirement. Here is everything you need to know about this option to reduce your tax burden.
Pension Splitting Explained
Pension splitting is a famous method of giving 50% of your eligible pension income to your husband, wife, or partner as per the common law. You can jointly elect your spouse to receive the funds. Of course, you must meet specific requirements for income splitting before retirement.
How To Qualify For Pension Splitting
Here are some requirements you must meet for pension income splitting before retirement:
- You and your partner must be residents of Canada
- Living together with your partner at the end of every year is necessary
- You must also stay with each other for at least 90 days or above during the start of the year
Benefits Of Using Pension Splitting To Split Income In Canada
Here are the advantages of pension income splitting before retirement:
- Reduced Tax Burden
The best part about pension splitting is that it can reduce your tax rate by equalizing the income of you and your partner. This means the overall tax rate for pension splitting will be low, helping you save more money.
This method also helps you reduce the tax bracket of your household if your partner earns significantly less than you. You can also benefit from this splitting by using a registered retirement savings plan (RRSP).
- Variable Percentage
The best part about pension splitting is that it offers control to you over the distribution. You can send up to 50% of your funds to your spouse to reduce the tax burden. Remember, when you and your partner are elected, you can choose a specific splitting percentage.
An interesting thing about the percentage is that you can change it after every year. So if you choose to split 20% of your income, you don’t have to follow the same figure next year. You can increase the limit while making sure it is under 50%.
- Less Paperwork
Many of you have to register a pension plan to benefit from this income splitting before retirement. However, you can reduce your paperwork by avoiding registering for a pension plan. You can benefit from this strategy by converting your other accounts.
For instance, you can convert your RRSP or profit-sharing plans (deferred) to a pension plan. Less paperwork means you will have more time for other important tasks.
This is all you need to know about using pension splitting to split income in Canada. Remember to check if you meet all the requirements.
Any failure to meet the needs will prevent you from splitting your income. You must be a Canadian resident living with your spouse at the beginning and end of the year with your website.