Within a couple, the income of the spouses in retirement is not always the same. Here's how to rebalance the amounts and do well from a tax perspective.
Our progressive tax system means that the higher your income, the higher your tax burden is, a rule that also applies to retirement income. “For example, if we rely on the current tax tables, with an annual income of $100,000, the taxpayer will have to pay around 26 to 27% to the tax authorities, so around $27,000,” explains Simon Houle, financial planner at Onyx With IA Private Wealth Management affiliated group and secretary-treasurer of the ÉducÉpargne organization.
On the other hand, if each member of the couple receives income of $50,000, the tax bill is $9,000 each (18%), for a total of $18,000, or $9,000 less!
Therefore, it is ideal to balance the income of the spouses to reduce the tax impact.
Spousal RRSP
This strategy must be implemented before retirement. The person with the highest income contributes amounts to their spouse's RRSP.
The person making the contribution benefits from the tax deduction, even if the amounts contributed to the RRSP now belong to the spouse.
“Please note that this money cannot be withdrawn from the RRSP for a period of approximately two years – three years must have passed since December 31 – otherwise it is the contributing spouse who pays the tax and not the one making the withdrawal .” warns Simon Houle.
- Listen to the personal finance discussion with Jean-Sébastien Jutras, financial planner at Jutras Gestion de Patrimoine QUB :
What happens in the event of a separation? If the couple is married, family assets are divided between the spouses, particularly RRSPs. However, this does not apply to people in civil partnerships. “If the couple separates, the person keeps the contributions, even if they were paid by the spouse. To protect yourself, you can conclude a cohabitation agreement that regulates who keeps what,” emphasizes the financial planner.
Share the QPP
This strategy can be used 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 them between them. This means that part of one spouse's retirement pension goes to the other. The couple can be married, civilly married or in a civil partnership.
In this way, the tax burden of the person with the highest income is reduced because part of their pension is added to the spouse's income. Ultimately, the overall tax will likely be lower.
“You should know that sharing is not necessarily equal, but is calculated based on the length of time you live together,” explains Simon Houle.
Distribution of pension income
It is also possible to split up to 50% of income from an employer pension fund, RRIF or LIF (lifetime income fund) with your spouse starting at age 65. “It is an accounting entry, the distribution only takes place at the tax level,” emphasizes Simon Houle. This means that the money is not transferred to the spouse's account, but remains in the beneficiary's account. Please note that a division of the employer pension fund is also possible before the age of 65, but only at the federal level and not at the state level.
RRIF withdrawal
After age 71, RRSPs must be rolled over to an RRIF. From then on, you must withdraw a minimum amount based on your age. The older you get, the higher the percentage is. However, if your spouse is younger, you can withdraw the amount that corresponds to their age and not your age. This simultaneously reduces your income and thus the tax.
Avoiding a reclaim of the old age pension
The equalization of income between spouses has another advantage: This means that the reclaim tax on the old-age pension (PSV) can be reduced or eliminated entirely.
You should know that you will have to repay some or all of the PSV if your net income exceeds a certain threshold. Currently, this amount is $86,912 for the 2023 income year, but it will increase gradually.
We may therefore have to refund 15% of the amount exceeding this threshold. To do this, your monthly PSV will be reduced to take this refund tax into account. Note that the calculation is made every year based on the income earned. By reducing your income, you can also reduce or even avoid recapture tax.
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