Pension Income Splitting

Courtesy of Invesco, Posted 24 Jul 2014

In 2006 the Canadian federal government introduced the ability for seniors to split pension income between spouses. This is a great opportunity for couples that one person receives pension income while the other has little-to-no income. If the pension is split between them, they could pay less tax as they are each now in a lower tax bracket.

This splitting is only applicable to qualifying “pension income” which includes income from a registered pension plan (RPP). However, if you are over the age of 65 this income could also include an annuitized RRSP, Registered Retirement Income Fund (RRIF), Life Income Fund (LIF) or Locked-in Retirement Income Fund (LRIF), or deferred profit sharing plan (DPSP). When you are younger than 65 your options of qualifying income are more limited because the government targets this tax-saving vehicle to those who are retired and on a fixed income.

How does it work?

Throughout the year the pensioner continues to receive his or her pension income in his or her name. The splitting occurs when you file your tax return – form T1032 allows you to jointly elect how much of the pension income is to be split to your spouse. This process is followed each year and can be adjusted (or not split at all) depending on changes to income or other financial circumstances.

Pension income splitting not only helps alleviate your tax bill, but also helps couples avoid the Old-Age Security clawback. OAS benefits begin to be reduced when an individual’s income reaches $70,954 (in 2013, for example), and pension income splitting can allocate enough of your annual income to your spouse, avoiding your OAS benefits being reduced.

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