Pension Income Splitting
Beginning with the 2007 tax year, Canadian residents may split certain pension income with their resident spouse or common-law partner. This can be done if the following conditions are met:
- The pensioner and spouse or common-law partner were not, because of a breakdown in marriage or common-law partnership, living separate and apart from each other at the end of the year and for a period of 90 days commencing in the year (if living apart at the end of the year for medical, educational, or business reasons, pension income can still be split)
- the pensioner and spouse or common-law partner are residents of Canada on December 31 of the year; or
- if deceased in the year, resident in Canada on the date of death; or
- if bankrupt in the year, resident in Canada on December 31 of the calendar year in which the tax year (pre- or post-bankruptcy) ends.
- the pensioner received pension income that is eligible for the pension income amount tax credit
- Up to 1/2 of eligible pension income may be allocated to the taxpayer's spouse when the tax returns are filed. In some cases this will result in a pension income tax credit for the transferee.
No funds are actually transferred using pension splitting - it is
simply a method for reducing the taxable income of one spouse by
allocating income, on the tax return, to the other spouse. The
transfer must be agreed to by both spouses, by filing the Canada
Revenue Agency (CRA) form
T1032 - Joint election for pension
splitting, with the tax return. The T1032 form refers to the total
amount of eligible pension income for the taxpayer, which is
calculated on CRA's
Federal Worksheet 5000-D1 for all provinces and
territories except Québec, and on
Federal Worksheet 5005-D1 for
Québec.
Form T1032 also provides an area for input of the total amount of
withholding tax deducted from the pension income of the transferor.
The withholding taxes related to the transferred pension income are
then transferred to the spouse, on a pro-rata basis. Thus, if 40% of
the pension income is transferred to the spouse, 40% of the
withholding taxes will also be transferred.
If both spouses are in the same tax bracket, pension splitting will
not provide the benefit of a reduction in the marginal tax rate.
However, it may still be useful, if it creates or increases a
pension tax credit for the transferee. There is a federal pension
income tax credit on the first $2,000 of eligible pension income
(see Personal Tax Credits Tables for provincial amounts). Pension
splitting will only create a pension income tax credit for a pension
transferee (the one to whom the split-pension is transferred) who is
under age 65 if the pensioner (pension transferor) has received
qualified pension income, which is eligible for the pension income
tax credit for a taxpayer of any age. If this situation applies to
you, see Completing Step 4 of the T1032 on the Pension Income Tax
Credit page.
See also the CRA information on
pension income splitting.