Pension income splitting

If you’re receiving income that qualifies for the pension income tax credit (see topic 90), you’ll be able to allocate up to half of that income to your spouse or common-law partner (and vice versa). Although pension income can also be split in the year of death, there are special rules that apply depending on whether it’s the pension income recipient or transferee that has passed away.

The extent to which pension income splitting will be beneficial will depend on the marginal tax bracket of you and your spouse or common-law partner, as well as the amount of qualifying income that can be split. In many cases, the optimal allocation will be less than the allowable 50% maximum.

Example: Your total income for 2016 is $90,000, of which $60,000 is qualifying pension income. Your spouse has no pension income and only $5,000 in other sources of income. You can allocate up to $30,000 of your pension income to your spouse. In this case, you’ll report taxable income of $60,000 and your spouse will report taxable income of $35,000. Both of you can claim the pension income credit (see topic 90), and you will no longer be subject to the Old Age Security (OAS) clawback (see topic 72). The overall savings can be considerable.

To qualify for income splitting, the pension income must satisfy certain criteria. If you’re 65 years of age or older, eligible pension income includes lifetime annuity payments under a registered pension plan (RPP), a Registered Retirement Savings Plan (RRSP) or a deferred profit sharing plan (DPSP), and payments out of or under a Registered Retirement Income Fund (RRIF). If you’re under 65 years of age, eligible pension income includes lifetime annuity payments under an RPP and certain other payments received as a result of the death of your spouse or common-law partner. Eligible pension income doesn’t include payments under the Canada Pension Plan (CPP) or OAS payments.

If you opt to pension split, a special election form (Form T1032) must be signed by you and your spouse or common-law partner and filed with the CRA. If you file your return electronically (see topic 161), you should keep the election form on file in case the CRA asks for it. Another result of pension splitting is that the income tax withheld from your pension income will be reported on your spouse or common-law partner’s return, proportional to the amount of income being split.

Example: Using the figures from the example above, you elect to split 50% of your pension income with your spouse. On your T4A, $10,000 was deducted for income tax. You’ll report 50% of this amount as tax withheld (or $5,000) and your spouse will report the other $5,000. If you had only elected to split 30% of your pension income, $3,000 of income tax withheld would be reported on your spouse’s return.