The Benefit of Splitting Pension Income
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.
Qualifying for Pension Income Splitting
- 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.
- You are allowed to live apart if the reason is related to work, school or medical necessity.
- However, if you live apart due to a breakdown in your relationship, you cannot split your pension income.
Pension Income Eligible For Splitting
Retired taxpayers receive pensions from multiple sources such as:
- Registered Retirement Pension Plan (RRSP)
- Pooled Registered Pension Plan (PRPP)
- Registered Retirement Income Fund (RRIF)
- Canada Pension Plan (CPP)
- Old Age Security (OAS)
- or from a non-registered plan
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. Lump-sum pension payments, foreign pension, transferred RERIF amount, and non-registered pension plans are not eligible for pension splitting.
Pensioners are divided into three different categories:
- People 65 or older as of December 31st of the tax year
- People under 65 as of December 31st and are receiving pensions due to the death of their spouse or common-law partners
- People under 65 as of December 31st and are receiving pensions NOT due to the death from their spouse or common-law partners
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.
- The form has to be signed by both parties and be available upon request by CRA.
- The transferred portion is reported on Line 11600 of the income tax return of the transferee.
- The deducted portion is reported on Line 21000 of the transferor’s income tax return
- When you transfer some of your pension income, your taxes paid which are associated with the transferred amount will be reduced and transferred on the transferee’s income return. So Line 43700 of both returns will be changed accordingly.
This form is quite complex. If you are using tax preparation software such as TurboTax standard, 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 called Pension Income Amount 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 31400 of the T1 form. For more information on which pension is eligible for Pension Income Amount, please visit this CRA link or the link to the CRA table.
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. Keep in mind that T1032 has to be signed by both couples. If one of the spouses is incapable of signing this form, the partner will need a power of attorney to sign on his/her behalf.
Turbo Tax standard Products or higher optimizes your pension splitting options automatically.
Check this CRA link for more information on line 1150 (other pensions and superannuation) of your tax return.