Pension Income Splitting

by Dean Paley on March 3, 2010

The 2007 tax year was a big win for seniors when the Government introduced pension income splitting which allows lowering income taxes between spouses.

Prior to these new rules, only Canada Pension Plan could be split but the calculation was done by the Government and was not straight forward.

How Pension Splitting Works

back-porchIn order to split your pension income, you have to be receiving income that is eligible for the pension income tax credit. Generally speaking this is payments from a defined benefit pension plan, or RRIF payments if you are age 65 of older.

The person receiving the pension income need only qualify. For example, say you are over age 65 and receiving RRIF income and your spouse is under age 65. You can split your RRIF income and allocate some to your spouse who is under 65.

Both spouses have to agree to split the income and make the proper election to do so. You bot make an election by filing the CRA’s form T1032 – Joint Election to Split Pension Income with their tax returns.

You can allocate up to 50% of your eligible pension income to your spouse or common law partner.

What To Watch out For

If you are both in the same income tax bracket, there is no benefit to splitting pension income unless the transfer creates or increases the pension tax credit for the spouse receiving the pension income.

If you allocate pension income to your spouse and they have none, then they may be able to claim the pension income tax credit.

Moving pension income from one spouse to another will affect and age credit, spousal credit, or other income testes tax credits you or your spouse receives.

Be aware that since pension splitting will affect both spouses income, that you should be aware of the impact to other benefits such as Old Age Security or the Guaranteed Income Supplement. These could be subject to increases or the OAS clawback.

Looking For Professional Help?

There are a number of income splitting techniques that can be employed by business owners and seniors.

Call us at (289) 288-1206 or email us to arrange an appointment to have us review your tax situation and look for opportunities to reduce your family tax bill.

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