Opportunities for pension income splitting
Tax Managed Strategy 15
Spouses1 are allowed to split qualified retirement income with their spouse. This can result in a reduction of family taxes and can also minimize the impact on income-tested tax credits and benefits like the age amount and medical expense tax credits and Old Age Security (OAS). If you have a spouse who is in a lower tax bracket, you and your spouse are able to elect to have up to 50 per cent of eligible pension income transferred to the lower income spouse. Eligible pension income is defined as income eligible for the pension income credit and a few specific, less common items.
What types of income are eligible?
The types of eligible pension income that qualify for pension income splitting depend on your age. It’s important to note that government plans such as the Canada/Quebec Pension Plan (CPP/QPP) and Old Age Security (OAS) do not qualify for the pension income splitting rules.
Types of income that qualify for pension income splitting depending on the pensioner’s age2.
Income source |
Pensioner is under 65 the entire year3 |
Pensioner is 65 or older during the year |
Income received directly from a pension plan |
✔ |
✔ |
Income received as a RRIF successor annuitant |
✔ |
✔ |
Income from annuities purchased from RRSPs and DPSPs, non-registered annuities and ALDAs if received due to the death of a spouse |
✔ |
✔ |
RRIF income |
✖ |
✔ |
Annuities purchased from RRSPs and DPSPs |
✖ |
✔ |
Non-registered annuities |
✖ |
✔ |
ALDAs |
✖ |
✔ |
Qualifying life annuity payments out of a Registered Compensation Arrangement (RCA) |
✖ |
✔ |
For those 65 and older, income from non-registered investments will generally not qualify for pension income splitting with the exception of annuity income. However, many people don’t realize that a Guaranteed Interest Account (GIA) from a life insurance company may report the interest accrued as annuity income4 and this also qualifies for pension income splitting (and the pension income credit) beginning in the year you turn 65. For more information on this see The Pension Income Tax Credit and Pension Income Splitting Using an Insurance Company GIA .
Income splitting options
Eligible pension income
You can split up to 50% of eligible pension income with a spouse. Because of income-tested tax credits and benefits, the optimum transfer may be less than 50%. Some analysis will be necessary each year to determine the optimal amount to split with your spouse to maximize the reduction in taxes and minimize the impact on income-tested tax credits and benefits.
Canada/Quebec pension plans
Although not part of the Federal initiative with respect to pension income splitting, these government plans already allow spouses who are at least 60 years of age to equally share the benefits earned while living together. Note that the CPP post-retirement benefit is not eligible for pension sharing while the QPP post-retirement benefit is eligible for pension sharing.
Spousal RRSPs
Contributing to a spousal RRSP can also result in tax savings. Under the pension income splitting rules, most types of eligible pension income, other than income received directly from a pension plan and a few other exceptions, can only be split in years you are 65 or older. However, spousal RRSPs provide income splitting at any age and you are not restricted to 50%. Also, if you have a younger spouse, the income can be delayed until the year after your spouse reaches age 71.
For more income splitting ideas, see income splitting: the facts
Case Study
Here is an example of the potential benefits of pension income splitting
Spouse 1 is 65 or older and spouse 2 is between age 60 and 64. In this case a full 50 per cent split of eligible pension income maximizes the benefits. This is because now for spouse 1, OAS is no longer clawed back and the age amount tax credit is only partly clawed back. These clawbacks are not an issue for spouse 2 due to being under age 65. Also, spouse 2 now qualifies for the pension income tax credit due to spouse 1 splitting their company pension. This is in addition to tax savings from equalizing the spouses’ income.
Ideal candidates
- Those who are currently receiving income eligible for pension income splitting
- Those who have a spouse in a lower tax bracket
Take action
- Identify the income eligible for pension income splitting
- Determine, with your tax preparer, the optimal amount to transfer to your spouse
- You and your spouse make a joint election using Form 1032 to split pension income on your tax returns
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Important disclosure
1 Includes a spouse or common-law partner as defined by the Income Tax Act (Canada).
2 This list is not exhaustive and there are other types of income that can qualify for pension income splitting. RRIF stands for registered retirement income fund, RRSP stands for registered retirements savings plan. DPSP stands for deferred profit sharing plan. ALDA stands for advanced life deferred annuity.
3 Quebec taxpayers under 65 for the entire year can’t split eligible pension income for provincial tax purposes as of January 1, 2014.
4 If the GIA is redeemed prior to maturity the interest accrued since the last reporting date is reported as other income which does not qualify for the pension income credit or pension income splitting.
Any amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value.
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