Are you taking advantage of the pension income tax credit?

In 1975, the government established the $1,000 pension income deduction. Twelve years later in 1987, it was changed from a tax deduction to a tax credit and renamed the $1,000 pension income tax credit. More recently in 2006, the Federal Budget increased the Pension income tax credit amount from $1,000 to $2,000. This is great news for retirees trying to maximize their after tax income. Most recently, the 2007 budget introduced Pension splitting rules that created some new planning opportunities for couples with income from pension sources. It's a great time to revisit the pension income credit rules and opportunities.

What is the Pension Income Tax Credit?

The pension income tax credit is non-refundable and may not be carried forward each year. In other words, you need to use it or lose it. In order to claim the credit, the taxpayer must be in receipt of certain specified income. The definitions of "pension income" are therefore very important.

If you are collecting income from a superannuation or company pension plan, you will qualify for the $2000 Pension Income Credit immediately. In most cases, the earliest pension legislation allows you to draw pension income is age 55 (there are some exceptions like military pensions that allow you to draw income before age 55).

New pension splitting rules creates new opportunities for pension splitting

To illustrate how the new pension splitting rules work with the pension income credit, lets take a look at Alex and Bette. Alex retired at 60 years of age. He gets income from a defined benefit pension, Canada Pension and some part time contract work with his previous employer. Bette is 52 and still working part time. She never had a pension from work and despite working more regularly than Alex, she make considerably less income.

Under the new pension splitting rules Alex can give up to 50% of his pension income to Bette. As long as he is in a higher tax bracket than Bette, it is advantageous to give her some of his pension income. The splitting of the pension is done on the 2007 tax return with the new T1032 form.

In addition to the income splitting opportunities, Bette also benefits from the pension splitting because she now qualifies for the $2000 pension income credit. You see, regardless of Bette's age, by receiving some of Alex's pension income through pension splitting, she can utilize the pension income credit.

In other words, in situations where one spouse has a pension and the other does not, it may be advantageous for the spouse with a pension to give at least $2000 of his or her pension income to their spouse. That way a couple can both take advantage of the pension income credit and together qualify for $4000 of tax credits.

If you are under the age of 65, the only way you can qualify to take advantage of the Pension income Credit is if you have income from a pension plan or have a spouse who gets income from a pension plan and have that spouse give you at least $2000 of his or her pension through pension splitting using the T1032 form. With the 2007 tax filing deadline coming close, anyone getting pensions should take a look at not only the opportunities to split income but also the opportunities to take advantage of the $2000 pension income tax credit.

For those of you who do not have pension income, don't lose hope. There are rules that allow you to qualify for the pension income credit but only If you are 65 or older. Next week, I will share some strategies on how people with no pensions can 'create' pension income to qualify for the pension income credit.