Pension Income Splitting

Income splitting allows taxpayers to lower their income and in turn, their tax payable. It means if one spouse earns $60,000 and splits their income with their spouse or common-law partner, they will pay tax on $30,000 each, rather than $60,000. Tax rates increase depending on your income level so the lower the income, the less tax payable. However, the Tax Act only allows income splitting under very specific circumstances. For most taxpayers, this is not an option.

Beginning in 2007, the Federal Government began allowing seniors to split certain pension income. Only certain types of pension income are allowed to be split up to 50 percent of the income between a spouse or common-law partner. Qualifying pension income includes periodic pensions and superannuation payments, foreign pension excluding income from a U.S. Individual Retirement Account and annuities. It does not include lump sum payments, excess amounts from a Registered Retirement Income Fund (RRIF), retirement allowances, death benefits, Old Age Security (OAS) or Canada Pension Plan (CPP) benefits.

To split eligible pension income, both spouses or common-law partners must complete Form T1032, Joint Election to Split Pension Income and attach the form to their income tax returns. Taxpayers who file electronically should maintain a copy of the completed forms in case the Canada Revenue Agency (CRA) asks for them.

Benefits of Pension Income Splitting

The two most obvious benefits of splitting pension income are:

In addition, splitting of pension income has the potential to:

Drawbacks of Pension Income Splitting

Though many older taxpayers can benefit from income splitting, there can be negative effects such as:

It is important to review your tax situation before opting to split eligible pension income. The goal is to maximize the benefits and minimize the negative effects.