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Pension Splitting

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Filing Your Return -> Pension income splitting

Pension Income Splitting

Beginning with the 2007 tax year, Canadian residents may split certain pension income with their resident spouse or common-law partner.  This can be done if the following conditions are met:

bullet the pensioner and spouse or common-law partner were not, because of a breakdown in marriage or common-law partnership, living separate and apart from each other at the end of the year and for a period of 90 days commencing in the year (if living apart at the end of the year for medical, educational, or business reasons, pension income can still be split)
bullet the pensioner and spouse or common-law partner are residents of Canada on December 31 of the year; or
bullet if deceased in the year, resident in Canada on the date of death; or
bullet if bankrupt in the year, resident in Canada on December 31 of the calendar year in which the tax year (pre- or post-bankruptcy) ends.
bullet the pensioner received pension income that is eligible for the pension income tax credit

Up to 1/2 of eligible pension income may be allocated to the taxpayer's spouse when the tax returns are filed.  In some cases this will result in a pension income tax credit for the transferee.

No funds are actually transferred using pension splitting - it is simply a method for reducing the taxable income of one spouse by allocating income, on the tax return, to the other spouse.  The transfer must be agreed to by both spouses, by filing the Canada Revenue Agency (CRA) form T1032 - Joint election for pension splitting, with the tax return.  The T1032 form refers to the total amount of eligible pension income for the taxpayer, which is calculated on CRA's Federal Worksheet 5000-D1 for all provinces and territories except Québec, and on Federal Worksheet 5005-D1 for Québec.

Form T1032 also provides an area for input of the total amount of withholding tax deducted from the pension income of the transferor.  The withholding taxes related to the transferred pension income are then transferred to the spouse, on a pro-rata basis.  Thus, if 40% of the pension income is transferred to the spouse, 40% of the withholding taxes will also be transferred.

If both spouses are in the same tax bracket, pension splitting will not provide the benefit of a reduction in the marginal tax rate.  However, it may still be useful, if it creates or increases a pension tax credit for the transferee.  There is a federal pension income tax credit on the first $2,000 of eligible pension income (see Personal Tax Credits Tables for provincial amounts).  Pension splitting will only create a pension income tax credit for a pension transferee (the one to whom the split-pension is transferred) who is under age 65 if the pensioner (pension transferor) has received qualified pension income, which is eligible for the pension income tax credit for a taxpayer of any age.  If this situation applies to you, see Completing Step 4 of the T1032 on the Pension Income Tax Credit page.

If you should have split pension income in a prior year but didn't, it's not too late - you can adjust your prior tax returns to do so.  However, make sure that combined taxes payable are reduced by doing this, and keep in mind that the taxes payable of one spouse will probably increase, resulting in interest on the tax amount payable.

In the year you turn 65, if you don't already have eligible pension income, you might want to create some by converting at least a portion of your RRSP to a RRIF.  This would allow you to take advantage of the pension income tax credit and pension splitting with your spouse.

Our Canadian Tax Calculator provides the option of pension income splitting.

See also the CRA information on pension income splitting, and their Pension Income Splitting video.

For other income splitting ideas, see the Income Splitting article on the Personal Tax page.

Tax Tip:  RRSP withdrawals are not qualifying pension income for purposes of pension splitting.  If you retire early RRSPs may be your main source of income, so it is still important for both spouses to have RRSPs.

 

Revised: November 09, 2014

 

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