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David Konning

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These rules are particularly good news for couples where the primary recipient of the qualifying income is subject to a tax rate that is significantly higher than that of their spouse.

Note that "spouses" includes persons who are married, as well as those who satisfy the definition of "common law partners" under federal income tax rules (including same sex couples), and who are not living separate and apart from each other as a result of a breakdown in their relationship.

In order to achieve the desired result for the couple, any amount between zero and 50 per cent of the qualifying income may be allocated to a spouse for income tax purposes.

Only certain types of income may be split under the pension income splitting rules. The types of income that qualify depend on the age of the person who is the primary recipient of the income.

The following summarizes the main types of income that may be split with a spouse, depending on the age of the primary recipient:

For primary recipients who are under 65 during the tax year:

* Periodic payments received directly from a defined benefit pension plan

* Certain types of annuity income received as a consequence of the death of a previous spouse or common law partner

For primary recipients who are 65 and older during the tax year:

* Periodic payments received directly from a defined benefit pension plan

* Payments received from an RIF, LIF, RLIF, LRIF or PRIF

* Payments received from annuities purchased with the proceeds of an RSP, RIF, LIF, LRIF or PRIF

* The taxable portion of payments received under certain types of annuity contracts purchased with non-registered funds (typically prescribed annuity contracts)

* Periodic payments received from a money purchase (defined contribution) pension plan in the same manner as permitted under a LIF - note that only some money purchase pension plans are designed to allow these types of payments

Some types of income that do not qualify:

The following summarizes some of the more notable types of income that do not qualify for pension income splitting. Note that this list is not exhaustive:

* Lump sum payments from an RSP

* Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) payments

(CPP/QPP payments may be split using a different set of rules)

* Old Age Security (OAS) benefits

* Payments received from a Retirement Compensation Arrangement (RCA) and several other types of supplementary retirement plans.

How to make the election to split pension income:

To split the qualifying income, there is nothing in particular that needs to be done at the time that it is received. In fact, the decision about how much income to reallocate can be delayed until it is time to prepare your income tax returns for the year in which the income was received.

Spouses who wish to split qualifying income must file a joint election form together with their income tax returns on or before the filing due date (generally April 30 of the year following the tax year or June 15 for self-employed taxpayers).

CRA form T1032 - "Joint Election to Split Pension Income" is available on the Canada Revenue Agency (CRA) public website.

Please contact me if I can help.

* David Konning is an investment and retirement planner at Royal Bank. He can be reached at David.Konning@rbc.com or at 856-0406.

The material in this Newsletter is intended as a general source of information only, and should not be construed as offering specific tax, legal, financial or investment advice. Every effort has been made to ensure that the material is correct at time of publication, but we cannot guarantee its accuracy or completeness. Interest rates, market conditions, tax rulings and other investment factors are subject to rapid change. Individuals should consult with their personal tax advisor, accountant, or legal professional before taking any action based upon the information contained in this Newsletter.

Financial planning services and investment advice are provided by Royal Mutual Funds Inc., a member company under RBC Wealth Management. Royal Mutual Funds Inc., RBC Asset Management Inc., Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company are separate corporate entities, which are affiliated. Royal Mutual Funds Inc. is licensed as a financial services firm in the province of Quebec