Tax Saving Strategy – Pension Income Splitting

There is an income tax saving strategy that is not often discernable either from the annual income tax guide or tax return form. It is called pension income splitting, and many taxpayers who could benefit aren’t familiar with pension splitting if they are not getting professional tax planning or tax return preparation advice.

An Accountant can optimize this calculation to ensure the best tax situation.

Who is eligible for pension income splitting?

With pension income splitting, the general rule is the taxpayer receiving private pension income throughout the year will be entitled to allocate up to half that income (without any dollar limit) to their spouse for tax purposes.

Pension income splitting is helpful to taxpayers on a pension. 

With pension income splitting, you can transfer up to 50% of the most pension and RIF income to lower-income spouses or common-law partners for income tax purposes. 

It is a government-sanctioned opportunity for married Canadian residents aged 65 or older. You and your spouse or partner must live together by the end of the tax year and be together for 90 days or more at the beginning of the next tax year.

Under 65

Suppose you are under the age of 65. In that case, the most common eligible income is from a registered company pension plan, whether a defined benefit or a defined contribution.

Suppose an individual does not have a registered pension plan. In that case, they can take advantage of this tax strategy if they convert their (RRSPs) Registered Retirement Savings Plans or their deferred profit-sharing plans to income through a life annuity or a Registered Retirement Income Fund (RRIF). However, this income doesn’t qualify for splitting until after age 65.

CPP can also be split in terms of government pension sources, but it is more complicated. The Canada Pension Plan (CPP) is not considered as eligible income, although the benefits from CPP can be split based on a separate set of “sharing” rules. Old Age Security (OAS) payments also are not eligible income.

The General Income Tax and Benefit Guide provide more pension income-splitting information. Refer to the CRA website.

Many taxpayers can control the timing and degree of their tax payable in retirement because of their different potential income sources. You can only spend your after-tax income, so the tax you pay will ultimately impact your retirement lifestyle and the size of your estate for your beneficiaries.

Pension income splitting is just one tool available to retirees to minimize their tax payable. In general, pension splitting is worth considering if one of the pension earners is in a higher marginal tax bracket than their spouse.

A.M.I. CPA Professional Corporation is a full-service accounting practice based in Oakville, Ontario, offering a broad range of accounting services to meet the needs of businesses, entrepreneurs, and individuals in Oakville, Burlington, and the surrounding areas.