As you approach retirement, reducing your tax bill becomes a top priority. If you’re holding GICs (Guaranteed Investment Certificates) as part of your investment strategy, there’s good news for you. GIC income from Canadian insurance companies can be split between you and your spouse after age 65. This simple but effective tax-saving strategy can help you keep more of your hard-earned retirement income.
Let’s break down how GIC income splitting works and how it can benefit you in retirement.
What Is GIC Income Splitting?
GIC income splitting is the process of dividing the interest income earned from GICs between you and your spouse. This strategy helps balance your income, potentially lowering the total amount of tax you pay. The best part? If your GIC is with a Canadian insurance company, it qualifies as pension income. This means it can be split between both partners once you’re 65 or older. Not so with bank GICs.
Income splitting isn’t available for all GICs. If your GIC is held through a bank, you won’t be able to split the income. But if your GIC is with a Canadian insurance company, like Manulife or Sun Life, you can take advantage of this benefit and reduce your overall tax burden.
Why Does GIC Income Splitting Matter?
When you or your spouse earns a higher income, it pushes you into a higher tax bracket, increasing the amount of tax you pay. For retirees, this can eat into your retirement savings quickly.
By splitting GIC income, you divide the interest earnings between two people. This spreads out the tax burden, especially if one of you is in a lower tax bracket. The end result? More money stays in your pocket instead of going to the Canada Revenue Agency (CRA).
Here’s why this matters for Canadian retirees:
- Tax savings on interest income
Splitting income between spouses can lower your overall taxable income, meaning you pay less tax on the interest earned from GICs. - Keep more of your pension
This strategy is particularly useful for couples with a significant pension or retirement savings, as it reduces the chances of moving into a higher tax bracket. - Improve your retirement cash flow
By reducing your taxes, you free up more of your retirement income for living expenses, travel, or future investments.
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GICs from Banks vs. GICs from Insurance Companies
Not all GICs are treated the same when it comes to income splitting. It’s crucial to understand the difference between GICs offered by banks and those offered by insurance companies in Canada.
- Bank GICs
GICs from a bank are not considered pension income. This means that while they may be a solid investment option, you won’t be able to split the income with your spouse, even if you’re over 65. This could mean paying more income tax.
- Bank GICs
- Insurance Company GICs
GICs from a Canadian insurance company, such as Manulife, Sun Life, or Desjardins, are eligible for income splitting. The CRA recognizes the income from these GICs as pension income, which means it’s splitable between spouses once you reach age 65.
This small difference can have a big impact on your income taxes. By moving your GICs to an insurance company, you open up the opportunity to save on taxes through income splitting.
How Much Can You Save by Splitting GIC Income?
Let’s look at an example to see how much you could save through GIC income splitting.
Imagine you and your spouse are both retired, and one of you has $10,000 in interest income from a GIC held with a Canadian insurance company. Instead of one person paying tax on the full $10,000, you can split that income in half, with each spouse claiming $5,000 in taxable income.
If your spouse is in a lower tax bracket, this means:
- Lower overall tax rates
Since your spouse is taxed at a lower rate, you’ll pay less tax on the $5,000 compared to paying full tax on $10,000. - Significant tax savings
Depending on your tax bracket, this could save you thousands of dollars each year. The higher the interest income from your GIC, the more you stand to save.
For high-income earners, especially those with a large pension or retirement savings, this can lead to big savings in retirement.
Where to Find Splitable GICs in Canada
Not all GICs are eligible for income splitting, but many major Canadian insurance companies offer GICs that qualify. Here are some of the top providers:
- Manulife
Known for a wide range of insurance products, Manulife offers GICs that qualify as pension income, making them splitable after age 65. - Sun Life
Sun Life also provides splitable GICs, allowing couples to lower their tax burden during retirement. - Desjardins
Desjardins offers GICs through its insurance arm, which means the interest income is considered pension income and can be split.
It’s worth speaking to a financial advisor to help you find the right GIC products for your retirement needs.
Simple Steps to Split GIC Income
Here’s how to get started with GIC income splitting:
- Review your current GIC holdings
Check whether your GICs are held with a bank or an insurance company. Only GICs from insurance companies are eligible for income splitting. - Move your GICs to an insurance company
If your GICs are with a bank, consider moving them to an insurance company that offers splitable GICs. Speak to a financial advisor to find the best options. - Ensure you and your spouse are age 65 or older
Income splitting is only available after you turn 65. Make sure both you and your spouse meet this requirement before attempting to split your GIC income. - Claim the income split on your tax return
When tax season rolls around, be sure to claim the income split on your tax return. Your financial institution can provide the details you’ll need to include in your return.
FAQs About GIC Income Splitting
Can I split GIC income before I turn 65?
No. GIC income splitting is only available once you and your spouse are both 65 or older.
Can all GICs be split?
No. Only GICs from Canadian insurance companies qualify for income splitting. GICs held at banks do not.
How much tax can I save by splitting GIC income?
The amount you save depends on your income levels and tax brackets. Splitting income with a lower-earning spouse can lead to significant tax savings, sometimes amounting to thousands of dollars per year.
Do I need to pay fees to move my GICs to an insurance company?
It depends on the terms of your GICs. Some may have fees for early withdrawal or transfer. Be sure to check with your financial advisor before making any changes. We’ll set you up with insurance GICs at no charge. We’re often authorized to refund those bank charges.
Can I split other types of investment income?
Only certain types of income, like pension income from GICs offered by insurance companies, qualify for income splitting. Speak with a tax advisor to learn about other eligible income sources.
Ready To Get Started With A Financial Advisor?
Splitting GIC income with your spouse is a smart way to reduce your taxes in retirement. If you’re holding GICs from a bank, consider moving them to a Canadian insurance company to take advantage of this tax-saving strategy. By doing so, you can keep more of your hard-earned money and enjoy a more comfortable retirement. At Pension Solutions Canada.com, we’re here to help you with the process! Call us or book a zoom consultation today.
