What is Pension Income Splitting?
Under the new rules, up to one half of pension income received that qualifies for the pension income tax credit can be transferred to your spouse or common-law partner (both of which are referred to as "spouse" below).
Why would we want to do this?
Splitting income allows the higher income spouse to transfer income to the lower income spouse, thereby taking advantage of the lower marginal tax rates of the lower income spouse and resulting in a lower overall tax bill to the couple. Because of this benefit available to spouses, the Income Tax Act only allows income splitting under very limited situations.
When does this apply?
Pension income splitting rules apply to taxation years 2007 and beyond.
What pension income can be split?
Payments from RPP, RRSP, RRIF, and some foreign pension payments.
What pension income does not qualify for splitting?
OAS, CPP (which can already be split under CPP rules), death benefits, retiring allowances, RRSP withdrawals, employee benefit plans.
How do we split the pension income?
By electing on Form T1032 prior to the filing deadline, in both spouse's personal tax returns to transfer the income. The transferor will deduct the elected amount from their income, and the transferee will include the elected amount in their income.
Is the transferred pension income eligible for the $2,000 pension income tax credit?
Do we have to split our pension income?
No. Each and every tax year you can elect how much pension income to split, if any. The rules recognize that many spouse's like to keep their finances separate from one another.
Will splitting pension income affect OAS payments?
Yes. Depending on the income levels of the spouse's it could decrease your OAS claw-back, or it could in fact increase your OAS claw-back. For this reason it is essential that you seek professional advice in determining whether you should split pension income or not.