Pension income splitting: How it works, advantages and conditions
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What is pension income splitting?
Since 2007, Canadian spouses or common-law partners have been allowed to split the pension income one of the spouse receives between the two spouses. No funds are transferred, the split occurs only on paper.
What happens if both myself and my spouse or common-law partner have pension income?
Great question! Each year, only one spouse can choose to split his pension income with his spouse. But that choice does not have to be the same from year to year and you don’t have to split the same percentage of income either. You can choose the best solution for your situation.
What are the advantages of splitting pension income?
As we all know, in Canada, people who make more money pay more income tax. This little-known strategy allows the spouse who has the highest income to lower his tax payable by sharing up to 50 % of his pension income with his spouse.
Are there other advantages than reducing income tax?
- It can be used to give access to the Pension Income Tax Credit to the spouse with the lowest income or to increase that spouse’s pension tax credit. To benefit from this scenario, the spouse receiving the pension income has to be under age 65. For example, the receiving spouse would declare $10,000 in pension income, claim the full amount of the Pension Income Tax Credit ($2,000) and see his federal income tax reduced by $300.
- Reinstate Old Age Security benefits by reducing or eliminating repayment (clawback)
- Reinstate Age Amount Credit by reducing or eliminating repayment (clawback)
What are the most common types of income that people can split with their spouse or partner?
The Canada Revenue Agency talks about qualified pension income. What it consists of varies depending if you are under or over 65. In general, that represents private pension income, including a pension received from a former employer. If you are over the age of 65, you can also split payments from an RRSP or a registered income fund (RIF).
What common types of income are not eligible?
- payments from the Canada Pension Plan (CPP) or the Québec Pension Plan (QPP)
- Old Age Security payments
- income from a United States individual retirement account (IRA)
Are there conditions my spouse and I have to meet to split my pension income?
In general, you cannot have lived apart for 90 days or more during the year due to a breakdown in your relationship and you both had to be residents of Canada.
How does it work?
Using tax software like TurboTax makes it super easy with the Pension Income Splitting Optimizer. We will ask you all the right questions and do all the calculations for you. Form T1032 has to be completed by both spouses (meaning both spouses have to agree to the split) and attached to both returns.
What if I could have split my pension income in previous years but didn’t know about it?
You might be in luck. The CRA’s normal reassessment period lasts three years from the date printed on your Notice of Assessment. That means that you may be able to go back three years and submit amended returns for you and your spouse that includes income pension splitting.
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