Tax Planning: Equalizing Pension Income and Understanding Capital Gains and Capital Losses

April 10, 2024

At this time of year Canadian residents are preparing to file their personal income taxes. The deadline to file personal taxes and pay any amounts owing is April 30, 2024. There is a late filing penalty, so it is important to file on time. The first step to take is to gather all your information slips for income received such as employment/pension income and investment income as well as slips for deductions including RRSP contributions. Equally important is educating yourself about strategies relevant to you and your family that can be used to reduce income taxes owing. The goal is to maximize after-tax income for families.

Opportunities for Equalizing Retirement Income

There are several strategies that aim to equalize income during retirement for spouses. This is important to keep in mind as it can reduce overall family taxes, minimize the effect on payments received from government programs that are calculated based on income and increase OAS entitlement for some families.

Income Splitting

Income splitting refers to transferring income from a higher income earning spouse to the lower income spouse. Both persons need to agree for the transfer of income.

Spouses over the age of 65 can allocate up to 50% of qualifying pension income to a spouse. Qualifying pension income includes Registered Retirement Income Funds (RRIF), Deferred Profit Sharing Plan (DPSP), Registered Pension Plan (RPP) and Registered Retirement Savings Plan (RRSP) annuity payments. For individuals under the age of 65 qualifying pension income is primarily received from RPP payments. The amounts allocated will be deducted from the income of the transferor and added to the income of the transferee.

Canada Pension Plan (CPP) Sharing

CPP and OAS payments are not part of the federal income tax law for income splitting. However, legal spouses or common-law partners who are living together and are over the age of 60 can share their CPP payments in a ratio that reflects the time the couple was living together during the period the contributions were made. The maximum allowable to be split is 50% of each spouse’s benefit. If both partners receive CPP payments, then both pensions must be shared.

Spousal Registered Retirement Pension Plan

Prior to retirement, preplanning to equalize pension income is ideal and can be completed through spousal RRSPs. Unlike CPP sharing and retirement income splitting, they are not restricted to 50%, funds can be withdrawn at any age however one must be mindful of the RRSP contribution limit of the contributor and attribution rules. Spousal RRSPs are advantageous if one spouse is in a greater marginal tax rate than the other and would receive a greater income tax deduction. In the case of income equalization for retirement, if one spouse is expected to have less income this approach could assist in evening out pension income between spouses.

Read more from our previous article: Understanding Registered Retirement Savings Plans, December 14, 2022

Capital Loss Strategies

Volatility in the market is inevitable. If you have invested in real estate or have held stocks, bonds or mutual funds within an investment account then you could have experienced a capital gain or a capital loss.

What is a Capital Gain/Capital Loss

Capital gains or capital losses are realized when capital property, such as a cottage, rental property or stocks/bonds/mutual funds are sold. This is calculated by subtracting the original purchase price of the property, plus any other costs incurred to acquire the property or make improvements to the property, and the cost to sell the property, from the sale price of the property. If there is a financial gain resulting from this calculation, it is considered a capital gain. If the calculation results in a financial loss, then it is considered a capital loss.

Taxation on a Capital Gain/Loss

If the capital gain or loss is earned outside of a tax-shelter, then 50% of the capital gain is taxable capital gains and 50% of the capital loss is allowable capital loss with capital losses only being applied against capital gains.

The Canadian Income Tax Act mandates that capital loss must first be used to offset capital gains within the same tax year, however if there is excess capital loss then this amount can be carried back three years and carried forward indefinitely to offset any taxable capital gain. Consider carrying back the capital loss first to offset the earliest capital gain within the previous three-year window to avoid it falling out of the timeframe especially if your marginal tax rate (MTR) is at least equal to or higher than the other two years.

The goal is to maximize after-tax income, so it is important to understand the various Canadian tax laws and how to apply these to your own personal tax return. Seek the expert advice of a licensed taxation professional to ensure you are taking advantage of all potential benefits.

Read more from our previous article: Preparing Your Income Tax Return, March 8, 2023

FirstOntario Credit Union in partnership with Aviso Wealth has an experienced team of advisors specializing in various areas of wealth management including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.

Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc.. The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This should be considered as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds. The views expressed are those of the writer and not necessarily those of Aviso Wealth.