Pension Income Splitting

Spouses and common-law partners can jointly elect to split up to half of eligible pension income for tax purposes. The pensioner deducts the split amount and the receiving spouse reports it, which can lower the couple's total tax substantially when their incomes differ.

HOW TO ELECT

Both spouses complete and sign Form T1032, Joint Election to Split Pension Income, and file it with both returns.
The transferring spouse deducts the elected amount on line 21000; the receiving spouse reports it on line 11600.
Tax withheld on the pension is allocated in the same proportion (line 43700).
The election is made fresh each year, so the amount can change annually.
Both spouses must be resident in Canada on December 31 and not living apart because of a breakdown of the relationship for 90 days or more at year end.

ELIGIBLE PENSION INCOME

At any age: life annuity payments from a registered pension plan.
At 65 or older: also RRIF and LIF payments, RRSP annuities and certain other annuities.
Not eligible: OAS, CPP or QPP (though CPP can be shared through Service Canada), lump-sum RRSP withdrawals, and retiring allowances.

BENEFITS

Moves income from a higher bracket to a lower bracket.
Lets the receiving spouse claim the pension income amount (if 65 or older or receiving qualifying amounts).
Can reduce or eliminate the OAS clawback for the higher-income spouse.
Can protect the age amount, which declines with net income.

POTENTIAL DRAWBACKS

Raising the receiving spouse's income can reduce their own age amount or increase their OAS clawback.
The receiving spouse may need to pay instalments.
Tax software can optimise the split percentage automatically.

EXAMPLE

A retiree with a $70,000 workplace pension and a spouse with $15,000 of income elect to split $27,500. Each then reports about $42,500. The transferred income moves from the 29.65 percent Ontario bracket to the 19.05 percent bracket, saving roughly $1,600 a year, plus about $380 more because the receiving spouse can now claim the $2,000 pension income amount.

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