September always feels like a time of new beginnings and some folks take time as the days cool to consider their year-end tax planning. Retirees should examine their year-to-date income and consider whether they should take more or less funds from their registered savings accounts (RRSPs and RRIFs).
A few basic reminders: (1) In the calendar year a taxpayer has their 71st birthday, RRSPs must be converted into a RRIF (or annuity) and an amount withdrawn each year. They can also be collapsed and paid in a lump sum, although this would only make sense if the balance is not too large. (2) An RRSP can be converted into a RRIF or annuity at any time, but this forces some defined amount to be included in taxable income each year. (3) Only defined types of pension income qualify for pension splitting. For example, income from company pension plans qualifies at any age, but RRIFs do not until age 65.
Some retirees opt to start withdrawing RRSPs earlier than age 71 which spreads the taxable income over a longer period of time. This can be beneficial in a year where income is expected to be lower than in the future, for example if OAS, CPP or pensions have not yet started. If the funds are not required for living expenses, transfer into a TFSA for later use.
Other retirees convert some of their RRSPs to RRIFs at age 65 to take advantage of the ability to pension split. Pension splitting allows one spouse to transfer up to 50% of their pension income to the other for tax calculation purposes only. This can result in much lower tax owing if that one spouse is in a higher tax bracket than the other. The transferee spouse also qualifies for the $2,000 pension income tax credit.
Each year you elect to do a pension split, complete and sign form T1032 and keep it on file in case CRA asks to see it. Couples who have not remembered to split their pension income can go back and adjust the past three years’ tax returns.
Gwyneth James MBA CPA, CGA is a partner in Cody & James CGAs which has been providing accounting services for over 20 years to individuals and small businesses throughout Peterborough City and County. (705) 876-6011 or codyandjames.ca