The 2007 tax year was a big win for seniors when the Government introduced pension income splitting which allows lowering income taxes between spouses.
Prior to these new rules, only Canada Pension Plan could be split but the calculation was done by the Government and was not straight forward.
How Pension Splitting Works
In order to split your pension income, you have to be receiving income that is eligible for the pension income tax credit. Generally speaking this is payments from a defined benefit pension plan, or RRIF payments if you are age 65 of older.
The person receiving the pension income need only qualify. For example, say you are over age 65 and receiving RRIF income and your spouse is under age 65. You can split your RRIF income and allocate some to your spouse who is under 65.
Both spouses have to agree to split the income and make the proper election to do so. You bot make an election by filing the CRA’s form T1032 – Joint Election to Split Pension Income with their tax returns.
You can allocate up to 50% of your eligible pension income to your spouse or common law partner.
What To Watch out For
If you are both in the same income tax bracket, there is no benefit to splitting pension income unless the transfer creates or increases the pension tax credit for the spouse receiving the pension income.
If you allocate pension income to your spouse and they have none, then they may be able to claim the pension income tax credit.
Moving pension income from one spouse to another will affect and age credit, spousal credit, or other income testes tax credits you or your spouse receives.
Be aware that since pension splitting will affect both spouses income, that you should be aware of the impact to other benefits such as Old Age Security or the Guaranteed Income Supplement. These could be subject to increases or the OAS clawback.
Tools To Help Split Pension Income
TurboTax Canada has a Pension Income Splitting Optimizer available on their TurboTax Standard version TurboTax Premiereditions. The TurboTax pension splitting optimizer helps you divide pension income between spouses for your maximum refund.
Related Articles
- How To Split Pension Income
- What Is Eligible Pension Income?
- What is Income Splitting?
- Why Pension Splitting Does Not Kill Spousal RRSPs
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{ 13 comments… read them below or add one }
I have been retired for the last few years. 100% of my income comes from a corporate pension. Can I split my income with my wife who does not have any income of her own?
@Ray B: If your pension is a superannuation type plan (i.e. a defined benefit pension plan) then definitely. Otherwise you have to be over 65.
(FYI – I have edited out some personal details.
I have a question, for my RRSP contributions, can I make the contribution in my name this year and contribute that to my wifes RRSP?
When she withdraws will she be contacted.
@Steve Z.,
You can contribute to your own RRSP and take the deduction or you can contribute to your spouses RRSP (spousal RRSP) and tax the deduction.
If you contribute to the spousal RRSP and your spouse withdraws from the plan in the current or prior to years, then the withdrawals will be tax in your hands up to the amount of your contributions.
Hi Tax Guy,
My understanding is that the only DB pension that qualifies is the registered pension amount, supplemental pension does not qualify as pension income under the meaning assigned by section 118 of the Act – that is, it takes the meaning set out in subsection 118(7), as modified by subsections 118(8) and (8.1). As such it does not qualify for the pension income tax credit and and does not qualify for pension income splitting. Let me know if you know otherwise @miazekCFP on Twitter.
Hello Nick,
I am not that familiar with supplemental pension plans but can say that I do agree with your assessment of 118(7), (8), and (8.1) but can’t confirm whether a SPP would or would not qualify as pension income.
There is a CRA interpretation bulletin (2008-0299941E5) that addresses this exact question.
The question as posed in that letter was:
“Is a pension paid from a provincial supplemental pension plan eligible for pension income splitting purposes?”
The response was that it is a question of fact and based on the facts in the letter, no.
The CRA response was as follows:
Subsection 118(8) of the Act specifically excludes certain types of income from the definitions of “pension income” and “qualified pension income”.
118(8)(e) and (f) exclude payments out of an RCA and unfunded supplemental plan
118(8)(f) defines and unfunded supplemental plan as payments received with respect to services rendered to an employer that would have been an RCA had the employer made contribution to the trust established for the plan.
My wife and I both received income from RPPs in 2010 and want to slit off some of my income. My question relates to sequencing of the return preparation. Do I do mine first and then hers or vice versa. The challenge is that I started roughing mone out on Turbo Tax which asked me to include data from her 2010 return.
Geoff
Geoff,
I’m not sure I understand what you mean by “slit off” some of your income but you can’t allocate any income to your spouse unless you are 65 or older and the income is eligible pension income.
Otherwise the RRSP withdrawals are must be claimed by the annuitant of the plan.
If this is a spousal plan that one spouse has contributed to and the other is withdrawing, you need to make sure you understand that the attribution rules apply back to contributions made in the current and prior two tax years.
Geoff,
RE: “The challenge is that I started roughing mone out on Turbo Tax which asked me to include data from her 2010 return.”
Assuming you and your wife are both over 65 so your withdrawals qualify for the election to split income on form T1032. Enter your tax info then your wife’s, Turbotax should only then calculate (or re-calculate) your optimal split (the transfered amount from the higher income spouse to the lower income spouse) that you will elect on filing your returns. The amount should not be calculated before all other credits and deductions for both of you are factored in.
Fool that I was, when I first heard about this I thought it applied to CPP and OAS (the only pension income my much-older spouse gets, and who knows if we’ll even have those benefits by the time I’M older). Guess what, sucker, you lose again. No provision for those who’ve never been fortunate enough to qualify for extras like a company pension, uh-uh…I should have stayed at my first job back in the ’80s. They indtroduced an employee plan just about the time I left after working there five years. Since then, I have never worked for a company that had such a plan.
If you call Service canada they will split the CPP credits.
I just turned 60 this past week and currently paid approximately $600 per month from a bridge until age 65. Would I be better to take the CPP at age 60 or wait and take the CPP at 65.
Regards Ray B
That’s the million dollar question. you’ll need to compare the cash flows and consider the opportunity cost of taking it early or deferring it to any age between 61 and 70.
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