Families

Eligible vs. Non-Eligible Pension Income

Having enough income for your retirement can make the difference between enjoying your golden years or not. One option available to qualified seniors to help stretch their retirement dollars is pension income splitting. “For taxpayers that are eligible, pension income splitting allows seniors to move up to 50 percent of their eligible pension income to their spouse,” explains Caroline Thompson, president of Thompson Accounting and Tax in Fort Erie, Ontario. “This can help them reduce and balance their tax exposure.” Splitting eligible pension income can result in lower income taxes and more money in your pocket.

Eligible Pension Income

To be eligible for pension income splitting, the pension amount must be received in the current tax year. It must also be the taxable portion of your pension plan or fund, or superannuation annuity payments received after you turned 65 years of age or older during the tax year. These payments can be from a Registered Retirement Income Fund (RRIF), Life Income Fund (LIF) and Registered Retirement Savings Plan (RRSP). If you are younger than 65, pension amounts from a deceased spouse or common-law partner may also qualify. The Canada Revenue Agency (CRA) provides a list of pension amounts on its website that are considered eligible.

Non-Eligible Pension Income

Not all pension income qualifies for splitting with your spouse or common-law partner and therefore deters both of you from taking advantage of the pension income credit. Pension payments that are ineligible for income splitting include Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). Other ineligible amounts are the Quebec Pension Plan (QPP), Canada Pension Plan (CPP), United States individual retirement account and payments that you may receive under a retirement arrangement. In some circumstances, tax-free pension amounts received from another country that Canada has a tax treaty with may be ineligible, as well as payments transferred to an RRSP or annuity from an RRIF.

Pension Income Splitting

If you receive eligible pension income during a tax year, you qualify for pension income splitting with your spouse or common-law partner, provided you meet certain criteria. You, the pensioner, and your spouse or common-law partner, the pension transferee, must be Canadian residents on December 31 of the tax year. If either is deceased, both must be residents on the date of death. You also need to be married or living common-law in the tax year and not be separated or living apart at the end of the tax year or 90 days or more commencing in the that year, unless the separation is due to medical, business or educational issues. Splitting pension income is not restricted by the age of your spouse or common-law partner.

Calculations

There can only be one joint income-splitting election during a tax year. If you and your spouse or common-law partner both receive eligible pension income, you must make a choice of who will be the pensioner and who will be the pension transferee. Use form T1032 to calculate the amount you can transfer from all sources of eligible pension income. Under certain circumstances, CRA will allow you to amend the form T1032 Joint Election to Split Pension Income or revoke it. The same amount of pension that is withheld from the pensioner’s income is claimed on the pension transferee’s income tax return. No more than 50 percent can be allotted to your spouse or common-law partner.

If you prepare your return using TurboTax Standard, Premier, or Self-Employed, finding the best possible amount to split is easy. Simply use the pension splitting optimizer within the software. Using income amounts previously entered by you in your return, the optimizer will determine the split amount that yields the best overall outcome for you and your spouse.

References & Resources