This spring—more than ever— couples should be filing their income tax returns together.
There are tax advantages for couples, such as the ability to combine medical expenses and donations. There is also some flexibility on which return certain amounts are claimed. Married pensioners have one other very important reason to file together this year – the ability to split qualifying pension income.
Our tax system utilizes a series of tax credits and marginal tax brackets. When you file a tax return in Canada it looks like one return but it is actually a combined provincial and federal return. With multiple schedules many people look to the last number – how much is either payable to Canada Revenue Agency or am I a getting a refund? It is important to note that changing one number on your tax return may have an effect on other credits and calculations within your return.
This level of complexity may make it difficult for pensioners who have prided themselves in always completing their own tax return. Trying to complete the different pension splitting scenarios may require a excellent eraser if you are trying to figure it out on paper forms using a pencil and calculator. Pensioners who have historically completed their tax return on paper may want to seek out a qualified accountant this year.
Public accountants should be on top of all the tax changes and use computers and tax software to complete returns, which makes it easier for them to do different income splitting calculations.
Here are some steps to consider to find the optimal splitting point:
- Your accountant may complete your returns without any income splitting. On the side, they may note the household tax liability (refund) with no income splitting.
- The first step should assist you in determining who has the highest income before income splitting. This step also involves looking at the incomes to determine if there is eligible pension income from the higher income spouse that may be split with the lower income spouse.
- Computers make it relatively easy to enter different income splitting percentages. You may split up to 50 percent of eligible income. Start with splitting 10 per cent and recalculate the household total tax liability (refund). Make a note of the combined tax liability (refund). Your sheet should have two numbers written on it now, one with no income splitting and the other number splitting 10 per cent.
- Increase the percentage in the computer to be split in small increments, such as five or ten per cent. At each increment, make a note of the household tax liability (refund). Continue this until the maximum 50 per cent is reached or until you see your tax liability increasing (or refund decreasing). This is a quick way to find the optimal “splitting point”.
If you and your spouse or common-law partner has jointly elected to split pension income then the higher income spouse will be able to deduct an amount on line 210, equal to the amount added to the lower income spouse’s return which should be reported on line 116. Line E on Form T1032 is the key dollar amount that your accountant may assist you with. The “Joint Election to Split Pension Income” form T1032 must be filed with your income tax return before the due date.
People who have already gone through the above exercise may find that the higher income spouse may be receiving a tax refund and the lower income spouse may have taxes payable. The shifting of income may cause a temporary cash flow problem for some couples as the lower income spouse may have a tax liability that is due by April 30. The refund for the higher income spouse may not arrive prior to this date. Unfortunately couples are currently not able to net their combined tax liabilities and refunds.
If you are using an accountant for the first time you should provide them with a copy of your previous year’s tax return and notice of assessment. If you have tax slips on joint accounts they will have only one social insurance number for the primary person. This does not mean that the income has to be reported 100 per cent on the primary’s tax return. If the account is a joint account then you should communicate with your accountant how these slips should be split. Income from joint investment accounts should be treated consistently from year to year. If you are unsure of how to report this income, then speak with your accountant.