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
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.