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Filing Your Return -> Pension Income Splitting

Pension Income Splitting

Income Tax Act s. 60.03, 56(1)(a.2), 220(3.201)

Canadian residents may split certain pension income with their resident spouse or common-law partner.  This started with the 2007 taxation year.  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)
bulletthe pensioner and spouse or common-law partner are residents of Canada on December 31 of the year; or
bulletif 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.
bulletthe pensioner received pension income that is eligible for the pension income tax credit, or payments out of a retirement compensation arrangement as noted below.

As per s. 60.03(a) of the Income Tax Act (ITA), up to 1/2 of eligible pension income as per s. 118(7) of the ITA 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.  The amount that can be transferred is reduced if the couple has not been married for 12 months in the taxation year.  For a deceased pensioner, the number of months married is the number of months up to and including the month of death.  The provincial pension transfer is the same as the federal pension transfer, except for Quebec taxpayers.  To calculate Quebec taxable income, the amount that can be transferred is not reduced if the couple has not been married for the full 12 months.

Note that the definition of eligible pension income for the purposes of pension splitting includes not only the above eligible pension income defined in s. 60.03(a) of the Income Tax Act (ITA), which may result in a pension tax credit, but also:

bulletif the taxpayer is age 65 or greater, as per ITA s. 60.03(b), payments out of a retirement compensation arrangement (RCA) which are in Box 17 of the T4A-RCA and identified as eligible for pension splitting, limited to the amount by which the defined benefit limit for the year ($3,025.56 for 2019) multiplied by 35 ($105,894.60 for 2019) exceeds the total amount of s. 60.03(a) eligible pension income (see above).
bulletfor 2015 and later years, as per ITA s. 60.03(c), amounts received by the individual in the year from
bulleta retirement income security benefit payable under Part 2 of the Veterans Well-being Act, or
bulletan income replacement benefit under Part 2 of the Veterans Well-being Act, if the amount is determined under s. 19.1(1), 23(1)(b) or 26.1(1) of that Act.
bullet limited to the amount by which the defined benefit limit for the year multiplied by 35 exceeds the total amount of s. 60.03(a) plus s. 60.03(b) eligible pension income (see preceding paragraphs).  Note that this income, which will be in box 128 of a T4A (Veterans' benefits eligible for pension splitting, also included in box 016), is also eligible for the pension tax credit.

Note re T4-RCA and tax software:  Your tax return software package may not have correctly processed the amounts from Box 17 of your T4-RCA in past years, either allowing you too much (if you're under 65) or too little (if you're 65+) income for pension splitting.  If you have received this type of income and are using tax software, check your return carefully, and check returns from prior years as well.

How Pension Splitting Works - Only on the Tax Return

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 Form T1032 Joint Election to Split Pension Income, 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.

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.

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.

Quebec Pension Splitting

The June 4, 2014 Quebec Budget announced that taxpayers under 65 would no longer be able to split pension income for provincial income tax purposes, as of January 1, 2014.

Late or Amended Pension Splitting Election or Revocation

Income Tax Act s.  220(3.201)

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.  A late or amended election, or revocation of an original election can only be done if the application is made on or before the day that is three calendar years after the filing-due date for the year that the election applies.  The taxpayer must be resident in Canada at the time the application for amendment is made.  If the taxpayer is deceased at the time the application is made, the taxpayer must have been resident in Canada immediately before the time of death.  This means that an application to amend the pension splitting for the 2017 taxation year would have to be made on or before December 31, 2021, because the original 2017 tax return was due on April 30, 2018.

Note that a calendar year is defined by Interpretation Act s. 37(1) as "a period of twelve consecutive months commencing on January 1".  Since the Income Tax Act indicates that the deadline is three calendar years after the filing due date, not three years, the deadline is December 31, 2021 instead of April 30, 2021.  This is confirmed by Canada Revenue Agency in Technical Interpretation 2011-0429921I7.

Other Resources

Canadian Tax & RRSP Savings Calculator: provides the option of pension income splitting.

Income Splitting: for other income-splitting ideas

Canada Revenue Agency (CRA) Resources

Pension income splitting

Tax Tip:  RRSP withdrawals (other than annuity payments) 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: April 27, 2021


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