All your life, you have been doing tax planning. If you think you will be relieved from taxes post-retirement, think again. Most pension and annuity incomes are taxable, whether government pension, registered pension, or non-registered pension. However, couples can reduce the tax paid on pension income using the Canada Revenue Agency’s (CRA) pension income splitting. This option is worth considering only when one of the spouses falls under the lower-income tax bracket. 

How Pension Income Splitting Works? 

The concept of pension income splitting allows you (the transferer) to split up to 50% of the eligible pension income with your spouse or common-law partner (transferee) with a lower taxable income. No transfer of money takes place. The split is only reflected in the income tax return, and the transferred amount appears in the transferee’s taxable income for tax purposes. 

There are two keywords here:

  • Up to 50%—This means you can transfer 40%, 30%, or any amount up to 50% of your pension to bring both partners’ taxable pension income on par. You can change the transfer ratio next calendar year. 
  • Eligible pension income—Not all pensions are eligible for pension income splitting. We will discuss eligibility later in the article. 

If both the partners have eligible pension income, they can decide who will be the transferer by calculating the tax benefit in different scenarios. A skilled tax consultant can help you use this option optimally to avail yourself of maximum tax benefits. 

Do You Qualify for Pension Income Splitting? 

Eligibility for pension income splitting depends on three factors: residential and relationship status, age, and type of pension income. 

Status: You and your spouse or common-law partner must reside in Canada and have stayed together for at least 90 days during the calendar year. If you are living apart, it should be because of work, school or medical reasons and not because of a breakup in a relationship. 

Remember, this benefit is for couples. Hence, your relationship status is essential. If you became a couple and started living together in July, the pension income splitting will occur from that month onwards and not for the whole year. 

Age: As 65 is the standard retirement age in Canada, the CRA determines pensioners for income splitting based on age. People turning 65 or older as of December 31 of the tax year have a broader scope of eligible pension income compared to those under 65 in the tax year. 

Eligible Pension Income: As a taxpayer, you have multiple sources of pension income. The government gives Canada Pension Plan (CPP) and Old Age Security (OAS). However, this income is not eligible for pension splitting regardless of age.

  • If the transferee is under 65, they can receive only certain life annuity payments, registered company pension plans, and RRSP and RRIF amounts from a spouse’s death. 
  • If the transferee is above 65, they can receive all registered and non-registered pension income, foreign pension, and annuity, except for government pension (CPP, OAS). 

Tax Benefits of Pension Income Splitting 

Once you have worked out the eligibility, it is time to understand the tax benefits of pension income splitting using an example. 

John and Janet are married and retired at age 65. They both earn eligible pension income. John earns $3,500 in monthly pension income plus some income from a side gig, which brings his annual taxable income to $72,000 ($42,000 from eligible pension). Janet earns $2,500 in monthly pension income and has no other source of income. Her annual taxable income is $30,000. In this scenario, John can split 50% of his pension income of $21,000 ($1,750 x 12) with Janet and reduce his taxable income to $51,000 ($72,000 – $21,000). Janet’s income will increase to $51,000 ($30,000 + $21,000), and both can pay a lower tax rate. 

Some pension income is subject to withholding tax. You get the pension income after deducting the tax. When you split your pension income, the withholding tax on the transferred pension is also transferred to the spouse. 

In our above example, if 40% of tax ($16,800) were withheld from John’s annual pension income, $8,400 (50% of the $16,800) of the withheld tax would be transferred to Janet along with pension income. Moreover, the spouse can avail pension income tax credit of $2,000 on eligible pension income. 

How To Split Pension Income?

If the math works and you are saving on tax by splitting pension income, here’s how to apply for it. Fill out Form T1032 Joint Election to Split Pension Income and the tax return. Ensure the information mentioned is the same and that you and your spouse have signed the form. 

Once the form is filled, the transferred amount will be added to Line 11600 of the transferee’s income tax return and deducted from Line 21000 of the transferor’s tax return.

How To Amend Pension Income Split? 

You can even amend the pension income split percentage by changing the percentage in Form T1032. You can also revoke the original election by submitting a request letter. These changes will only be accepted if the application is signed by both parties and submitted to the CRA within three calendar years after the election was made. 

Contact Glenn Graydon Wright LLP in Oakville to Help You File Your Tax Planning 

Talk to a tax expert to help you reduce your tax amount using benefits like pension income splitting. At Glenn Graydon Wright LLP, our accountants and tax consultants can provide services such as filing tax returns and availing various tax benefits CRA offers retirees. To learn more about how Glenn Graydon Wright LLP can provide you with the best tax planning, contact us online or by telephone at 905-845-6633.