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Income Splitting between spouses

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Income splitting can be handled by RRIFmetic in a fairly straightforward manner.

The problem is that we live in a single taxpayer world. When rrifmetic performs a compute, it does so in an extremely complex, recursive way. The amount of number crunching that occurs within a single 'amortize' calculation is huge... the tax formula (T1) may be computed up to 10-20 thousand times in a single run. To make this happen simultaneously with 2 spouses; and at the same time perform the reverse tax, ATI-driven math; simply won't happen. Not our lifetime anyway.

If the CRA ever comes up with a joint tax return, then it will be able to be done, until then... no way.

Having said that, it is possible to work around it, preserving tax accuracy at the same time. Read on....

For pensions, it is easy... simply split the pension stream and give part to each spouse. If they both have pensions, add them together and divide by two. If the pensions start at different times, you will have to adjust the streams accordingly such that the total pension income is equalized for each spouse.

For RSPs, if they are both under 65, then run each plan as you would do normally and take note of the size of each RSP at the 'large rsp'-holder's age 65 and that of the other rsp in that same year. Then, simply chop out an amount determined by the simple formula...(larger rsp - smaller rsp)/2 from the large rsp-holder by entering it (as a negative) in their 'rollover' column at 65 and drop it (as an equal but positive amount) in the other spouse's rollover column in the same year. (i.e. the year the 1st spouse turns 65)

As well, when you compute the plans after the RRSP has been rolled over, you must force the ATI of the spouse who is receiving the rolled over RRSP, in the years prior to the rollover, to the same level as it solved for before the rollover. Or, to make it really simple, if they are both over 65, just make each spouses' rrsp equal to 1/2 their total rsp holding,

This seems to be a reasonable (i.e. tax accurate) solution... there is a more detailed description in the help screen of the method (search on 'income splitting'), and we will be creating more documentation to this effect in the next while.

(the new version V2.7 has an Income Splitting tutorial)

The short answer to income splitting is... the program allows you to split rsp and pension income as it currently stands, although you have to be a little creative to effect it. Of course, don't forget... if you don't do income splitting, you are overstating tax, so you won't be compromising the safety of your plan.

IMPORTANT.... The income splitting rule doesn't specify that incomes need to be split, nor that there is any specific percentage which should be applied (except it cannot exceed 50%). The advantage of income splitting generally only occurs when one spouse is being taxed at a higher marginal rate than the other. It would be wise to examine the tax projection for each spouse first, before applying income splitting. If they are both in the same marginal tax bracket, then it is probably wise to forget splitting. If you do decide to income split, then choosing an exact amount (50%, say) is not that important. Just ensure that the amount you move/rollover from the major spouse is the same size (but different sign) as the amount in the other spouses's rollover column and happens in the same year.

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