Pension Income Splitting

Himani Ediriweera

If you are a retiree looking for a way to significantly reduce your overall taxes, and you have a partner in a lower income bracket, look no more. Pension splitting is an appealing tax strategy. 

Depending on which province or territory you live in, you could be paying up to $27,000 in federal and provincial taxes for a taxable income of $90,000. Transferring pension income from the higher-earning spouse to one in a lower tax bracket could result n thousands of dollars in savings for the whole family.

Pension splitting allows higher-income spouses to lower their payable tax by sharing up to 50% of eligible pension income with a spouse. Eligible pension income is defined as a pension plan or annuity payments. The payments are not actually split between the partners; the transfer in on paper for the purpose of tax calculations.

Pension-splitting eligibility

To qualify for pension splitting in Canada, a retiree must

  • be married or in a common-law partnership in the tax year. You also must be living together in that tax year for a period of at least 90 days.
  • be a Canadian resident in that filing period, as must the partner.
    • If deceased, have been a resident in Canada on the date of death.
    • If bankrupt, have been a resident in Canada in the tax year.
  • receive qualifying pension income in the year.

What payments are eligible for pension splitting?

If you are 65 years or older, eligible income includes 

  • Registered Retirement Savings Plan (RRSP), 
  • Registered Retirement Income Fund (RRIF) or 
  • Deferred Profit Sharing Plan (DPSP).

What payments are not eligible for pension splitting?

  • Canada Pension Plan (CPP) payments
  • Québec Pension Plan (QPP) payments
  • Old Age Security payments
  • Earnings from a United States individual retirement account (IRA)

What are the benefits?

  • Reduces the taxpayers’ marginal tax rate: By transferring income, you decrease your net income and increase the income of a spouse with a lower income.
  • Reduces or eliminates OAS clawback: If your clawback reaches the annual limit for the tax year, consider splitting pension income or sharing CPP to reduce your net income level. 
    • Sharing CPP or QPP is available to spouses receiving these pensions. Eligible pensioners must apply for CPP sharing. This is not the same as pension income splitting, yet a pensioner is able to assign a portion to a spouse or partner through CPP or QPP Sharing.
  • Creates a pension tax credit: Under the Pension Income Tax credit, taxpayers can deduct pension or annuity income of up to $2,000.00. Further savings are possible if both spouses can claim the $2,000.

How do you become eligible?

Both spouses must opt for pension income splitting on the T1032 tax form. If both spouses have eligible pension income, only one can allocate funds to a spouse or partner in each tax year. Both must file a tax return that includes the elected split-pension amount.

Before you split your pension or share benefits with a lower-income spouse, make sure it profits both of you and does not increase the transferee’s marginal tax rate.

1. Government of Canada, Pension Income Amount:
2. Tax calculator:
3. CRA, CPP/QPP sharing: