If you receive a larger pension than your spouse or common-law partner, it may be beneficial to transfer over a portion of your income on your tax return. This technique reduces your taxable income by shifting a portion to the lower-earning partner, thus reducing your overall tax burden as a retired couple or household.
Pension Income Splitting Eligibility
In order to qualify to split your pension income, you and your spouse or common-law partner must reside in Canada and live together at the end of the year. However, you are allowed to live apart if the reason is related to work, school or medical necessity.
If you live apart due to a breakdown in your relationship, you cannot split your pension income. Additionally, if you have lived apart due to a relationship breakdown for more than 90 days throughout the year, you are not eligible for income splitting.
Eligible Pension Income
Which pension income is eligible for splitting depends on both the age of the pensioner and the type of pension received. Pension payments from programs such as CPP (Canada Pension Plan) and OAS (Old Age Security) are not eligible for pension splitting regardless of age. If you are the recipient of the pension and are 65 or older, you may split income from your RRSP, RRIF, life annuity, and other qualifying payments. If you are under 65, only certain life annuity payments and amounts received from the death of a spouse (such as RRSP and RRIF) are eligible for pension splitting.It is important to note that Quebec taxpayers under 65 are no longer able to split pension income for provincial income tax purposes only.
Splitting Pension Income
- You may transfer up to 50 percent of your pension to your spouse or common-law partner.
- To split your pension income, you and your spouse or common-law partner must complete a Form T1032 — Joint Election to Split Pension Income.
This form is quite complex. If you are using tax preparation software such as TurboTax, your calculations will be done automatically based on your income type, amount and your overall tax situation. TurboTax also provides a pension splitting optimizer that allows you to see the best amount to split and make changes if you wish.
Pension Income Amount
When you report eligible pension income, you may be entitled to an additional credit of up to $2000. Pension splitting may qualify a spouse who doesn’t directly receive pension income to claim this extra amount as well.Based on your entries, TurboTax will automatically calculate and allocate your (and your spouse’s) pension income amount on line 314 of the Schedule 1.
Filing Your Taxes
As with other forms and schedules, if you are filing your return electronically, it is not necessary to mail in your Form T1032 — Joint Election to Split Pension Income. A copy is submitted to CRA when you Netfile. Keep your T slips on hand in case you are ever asked to provide more information.