Understanding Pension Splitting

Since its inception in 2007, pension splitting has enabled taxpayers in a common-law relationship or marriage to split eligible pension income with a spouse, provided they meet all requirements. A useful way of saving on taxes and mitigating credit erosion, pension splitting allows for couples to work together to create a more sound and secure future.

The Basics

Two spouses or common-law partners both residing in Canada at the end of the taxation year are able to jointly elect to split eligible pension income. Each taxpayer files CRA Form T1032 – Joint Election to Split Pension Income with their individual returns. This means that it isn’t split at source, unlike CPP sharing (when possible). One spouse can claim up to 50% of reported income, and their partner can claim a like amount. Pension splitting is subject to proration depending on changes in marital status or death, and unique elections can be made annually.

Qualifying Sources of Income

There are several sources of income eligible for pension splitting. Those aged 65 or older on December 31 of a given tax year can allocate up to 50% of qualifying income to a spouse of any age. Additionally, amounts may be paid out of RCA payments in the form of life annuities (not exceeding $102,005.40 for 2017), as well as RPPs and retroactive lump-sum payments. Taxable RRIF payments to the annuitant and/or a beneficiary also qualify, including those from locked-in plans. However, bear in mind that RRSP withdrawals do not qualify and, as a result, if an amount has rolled over to an RRSP, the RRIF or annuity can’t be split. There are many more qualifying and disqualifying sources of income, and it is recommended to consult the CRA’s list for further information.

The Advantages of Pension Splitting

The biggest benefit is that if the spouse being allocated the income is in a lower tax bracket, overall income tax savings rise dramatically. Additionally, only income qualifying for the $2000 pension credit is eligible for splitting, which means that generating income qualifying for it will save even more tax. Spouses receiving allocated amounts may also be eligible to claim this credit in certain circumstances. Another advantage of pension splitting is that it minimizes or even eliminates the erosion of the age credit, which is normally reduced once a taxpayer’s net income exceeds a threshold amount ($36,430 in 2017). The same rules apply for Old Age Security (OAS), which is also better protected against reduction.

Pension splitting enables for retirees to worry less about scraping to make ends meet, thanks to its ability to reduce taxes and raise credits while protecting against erosion. If you and your spouse or common-law partner are considering pension splitting, The Beacon Group of Assante Financial Management Ltd. can help clarify whether or not it is a viable option, and discuss this and other retirement planning strategies.