Tax planning doesn’t end when you retire. If you or your spouse receive income from a pension, you may be able to lower your tax bill by splitting some of that income with your spouse. Don’t write a cheque to your significant other just yet though! Pension splitting is a tax strategy that transfers eligible pension income to your spouse for tax purposes only. No actual cash needs to be exchanged – the transfer is only done on paper.
Potential Tax Savings
When retirement rolls around, many times one spouse has more income than the other. If you receive income from an RRSP or company pension plan, you may fall into a higher tax bracket and wind up with a higher tax bill than your spouse. By transferring up to 50% of your pension income through splitting, you can reduce your tax bill and bring down your net income for tax purposes.
Do I Qualify?
Whether or not you’re eligible to split your pension depends on two main factors: the type of pension income you receive and your age.
First, to split pension income, you need to have income that is eligible for the pension income amount. Eligible pension income can include payments from an RRSP, RRIF, company pension plan and some annuities. Income such as CPP, OAS, QPP, etc. is not eligible for the pension income amount and can’t be split.
If you’re over the age of 65, you’re in luck. The list of eligible pension income sources includes many more pension types than those under 65. Keep in mind that it’s only the person who receives the pension that needs to fit the age parameters, so you can split your eligible pension income with your spouse who is younger than 65. If you are under age 65, your qualified pension income is limited to registered pension plan payments and certain annuities and benefits that you received because of the death of a spouse. See the Canada Revenue Agency’s Eligible Pension and Annuity Income (less than 65 years of age) chart for details.
If you’re 65 or older, more types of pension income qualify, such as income from a superannuation registered pension plan, annuity payments from an RRSP, and payments from a RRIF, LRIF, or LIF. You can find a detailed list in the Canada Revenue Agency’s Eligible Pension and Annuity Income (65 years of age or older) chart.
(It’s important to note that the age rules for Quebec taxpayers are slightly different when splitting pension at the provincial level – only taxpayers aged 65 or older are eligible.)
How to Split Your Pension Income
You can allocate up to half of your eligible pension income to your spouse or common-law partner.
To do so, both you and your spouse have to elect to do so by completing and filing the Canada Revenue Agency’s Form T1032, Joint Election to Split Pension Income.
In subsequent tax years, you don’t have to use the same percentage split that you used to allocate your income in your original election, but you do have to complete and file a new Form T1032 with your taxes each year.
Effects on Old Age Security and Other Benefits
Because pension splitting changes the net income of both spouses, it’s important to consider any impacts beyond your tax return. While pension splitting can drop one spouse’s net income low enough to avoid an OAS clawback, in some cases the spouse receiving the transfer may be pushed over the income limit. Other programs such as long-term care subsidies also consider net income when determining eligibility so be sure to research any limits when deciding if pension splitting is right for you.