Frankly Speaking

Reduce Your Retirement Tax Bill: Part 1 - Income Splitting

Posted by Frank Wiginton on Tue, Nov 15, 2016

Many people pay too much tax in retirement. This is generally due to a variety of things but they all come down to not having prepared a proper comprehensive financial plan! The big question most people in retirement have is “Will I run out of money?”

There is a great calculator on the home page of my website at that will tell you whether you will run out of money, and if not, how much you will still have left as an estate. It will also tell you approximately what your lifetime tax bill will be. You will likely be surprised by the numbers – many are!

This is a four part series that talks about various ways to reduce your taxes throughout retirement.


Canada Revenue Agency allows you to split your income with a spouse or common law partner. You don't have to technically give them the money (which is probably a good thing in some cases), it is simply an election you make on one tax return and a declaration to accept the additional income on the others form.

Most tax software's like QuickTax and Ufile have tools that will automatically help you figure out the optimal amount of income to share and even fill out the proper forms for you.

Not all income can be split. This is where working with a financial planner to prepare comprehensive financial plan can help you understand what income can be split.

Pension income: if you receive income from a defined benefit pension plan at any time this income could be split with your spouse.

RRSP/RRIF income: any time you withdraw money from an RRSP. You cannot split it with your spouse. Only once you have converted your RRSP into an RRIF and you are 65 years of age or older can you then split the income with your spouse.

Investment income: in order to split investment income the account that you hold needs to be in joint ownership.

CPP: in technical terms, CPP cannot be split with a spouse. What you can do is apply to have your CPP credits assigned to each other. In order to do this you need to make an application to CPP and asked to have both yours and your spouses, CPP credits assigned. So simple example would be you would have 10 CPP credits and your spouse would have eight credits they would combine them into a total of 18 credits and then divide them by to giving each of you nine CPP credits.

Old Age Security/Guaranteed Income Supplement (OAS, GIS): neither of these social assistance payments can be split, but through income splitting you can help to ensure you don't have these incomes clawed back.

As you can see most of the income you could expect to receive in retirement can be split or shared with a spouse. Some of the income that cannot be shared with the spouse may be employment, income some forms of business income, and of course income that is only directly related to you and your investments.

So to look at an example a couple may need to have $60,000 a year after-tax money in order to have the lifestyle and pay the bills and do the things that they want in retirement. In preparing a proper financial plan for them this would mean we would aim to give each of them $35,000 of gross income. their average tax rate would be about 14%, and this would leave them each $30,000 of net cash in their pocket income.  This assumes that all of the income they receive is fully taxable.  (this is the subject matter for another segment).

As you can see income splitting can be a very powerful tool in ensuring there is sufficient income in retirement and recognizing that you don't need large sums of money to achieve the financial goals that you're looking for.

In the example above we only needed to draw $70,000 of assets in order to generate $60,000 of net income.

In the upcoming segments.  We will talk about ways to generate tax efficient income.  Reduce the taxation on your investment assets and look at a few strategies to reduce your lifetime tax bill.

How much income do you need to have in retirement?

What is your average tax rate in retirement?

How much money do you think you need in retirement to live comfortably?

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Tags: CPP, OAS, HubSpot Tips, retirement income, taxation, income splitting, income planning, financial plan, Canada revenue agency, RRSP/RIF, defined benefit pension, pension, ufile, quick tax, GIS, clawback

Why get a financial plan?

Posted by Frank Wiginton on Tue, Nov 15, 2016

planningPeace of mind and a better quality of life are simple answers.

I have been asked many times “Why should I get a financial plan? What questions can I get answers to?”

Many are not even aware of the array of questions they have when it comes to their personal finances. When I sit and chat with people about finances and mention some of the area’s to address they frequently respond with “I never thought of that before!”

To get a start here are just a few of the questions that can be answered by preparing a proper financial plan.

A financial plan will give you the answers and solutions to the following questions:

  • When can I retire?
  • Will I run out of money?
  • What should I invest in?
  • How much do I need to save?
  • Should I participate in my company’s pension or RRSP plan?
  • Should I pay down my mortgage or contribute to my RRSP?
  • Should I contribute to my RRSP or the TFSA or both?
  • Should I borrow to invest?
  • Should I have a fixed or variable mortgage?
  • What can I do to reduce my taxes?
  • How much and what kind of insurance should I have?
  • What is the most effective way to transfer my estate to my children?
  • How should I set up and or structure my business?
  • What is the most effective way to give to charity?
  • Am I on the right track?
  • Am I taking too much or too little risk with my investments
  • and many more!

To start your financial plan or to learn how we may be able to help you please contact me.

Tags: Mortgage, Charitable Giving, certified financial planner, Financial Planning, RRSP, Insurance, Personal Finance, Investment Management, business health insurance, defined benefit plan, life insurance, Debt, Line of Credit, income splitting, Tax Planning

Planning a Family? Prepare by splitting your income… with yourself?

Posted by Frank Wiginton on Tue, Nov 15, 2016

A growing number of young people have put education and a career ahead of a family. In the past 20 years the average age of women having children has risen from 26.9 to 29.6 and many more men are taking leave to raise children. These changes in our society have made it where parents are earning higher incomes prior to having children.

So is there a way to transfer some of that high income to years when we are off work raising a family?

Is there a way to reduce the tax we pay and still receive maternity and parental benefits?

In Canada we pay a lot in income tax, but we also receive a lot in social assistance. Through our Employment Insurance program mothers are entitled to 15 weeks maternity benefits and parents are entitled to 35 weeks parental benefits. You may receive a maximum of $21,500 or about $1790 a month. To someone earning $70,000 a year, that is a significant pay cut!

So what can you do? à Split your income!

Income splitting is a strategy that allows you to shift your income from high income years to low income years, thereby reducing the overall amount of tax you have to pay.

The way this works is that you make RRSP contributions in the years before you start a family, thereby reducing the tax you pay in those high income years. When you start to receive maternity and paternal benefits, you withdraw money from your RRSP’s. This increases your income for that low income year.

To explain lets look at an example: It is 2004, Tom and Sue are 29 and 30 years old. Both have done well in school and in there careers. Tom makes $50,000 and Sue makes $70,000. They plan to start a family in three years time and they plan to have two kids. They have decided that Sue will take all 50 weeks off and Tom will continue to work.

For the next three years Sue will put $1000 a month into her RRSP’s. This will reduce her taxable income from $70,000 to $58,000 and she will get back about $4000 on her tax return each year. ($4000 X 3 years = $12,000)

Once the child arrives in 2007 Sue’s annual income will drop to about $21,500. To help manage the significant decline in her income, Sue will withdraw $3000 a month for the next twelve months out of her RRSP. This amount combined with her benefits will give her an annual income of $57,500. Because Sue will withdraw $36,000 from her RRSP, she will have to pay tax on that amount. This means she will have to pay $6800 in taxes when she files her 2007 tax return.

So, using the income splitting strategy, Sue will end up saving about $5200 in taxes and keep her income at the same level throughout her time off. ($12,000 tax returns – $6800 tax bill = $5200 tax savings)

If the child is born late in the year (Oct ‘09) Sue may choose to defer her benefits and RRSP withdrawals until the start of the next year (‘10), thereby deferring the tax payable on it until the following year (March ’11).

Income splitting is a strategy that is often overlooked but should be considered when planning a family. It provides the benefits of reduced taxes and consistent income.

Another advantage is that if you don’t need the money, you don’t have to take it out of your RRSP!

All numbers are approximations for example purposes. Every individuals situation will be different.

Tags: Financial Planning, RRSP, Maternity leave, income splitting, Tax Planning, tax deferral