Pension income splitting can be a useful tax-planning strategy for Canadian couples. It allows a pensioner to allocate up to 50% of eligible pension income to their spouse or common-law partner for tax purposes.
The purpose of pension income splitting is to help balance taxable income between spouses and potentially reduce the overall amount of tax payable by the couple.
What Is Pension Income Splitting?
Under the pension income splitting rules, a person receiving eligible pension income can choose to allocate up to half of that income to their spouse or common-law partner.
The amount allocated is deducted from the pensioner's income on Line 21000 of the Income Tax and Benefit Return and included in the spouse or common-law partner's income on Line 11600.
Both individuals must agree to the pension split and make the election on their respective tax returns for the same year.
Pension income splitting can affect the tax payable and several other income-tested benefits and credits for both individuals.
What Pension Income Qualifies for Splitting?
Eligible pension income generally includes the following amounts received during the year:
- The taxable portion of annuity payments from a superannuation or pension fund or plan.
- Annuity and Registered Retirement Income Fund (RRIF) payments, including Life Income Fund payments, when the pensioner is 65 or older at the end of the year or the payments are received as a result of the death of a spouse or common-law partner.
- Registered Retirement Savings Plan (RRSP) annuity payments when the applicable conditions are met.
Pension Income That Cannot Be Split
Not all retirement income qualifies for pension income splitting.
For example:
- Old Age Security (OAS) payments do not qualify.
- Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) payments do not qualify.
It is important to identify the type of pension income before deciding how much can be split.
Who Can Split Pension Income?
A pensioner and their spouse or common-law partner can generally elect to split eligible pension income when:
- They are married or living in a common-law partnership with each other during the year.
- They are not living separately because of a breakdown in their relationship for 90 days or more beginning in the year.
- Both individuals are residents of Canada on December 31 of the year.
Special rules may apply if one of the individuals dies or becomes bankrupt during the year.
Living Separately for Other Reasons
A couple may still be eligible for pension income splitting if they live apart for reasons such as medical, educational, or business purposes, provided they are not separated because of a breakdown in their marriage or common-law relationship.
How Much Pension Income Can Be Split?
A pensioner can generally allocate up to 50% of their eligible pension income to their spouse or common-law partner.
The age of the pensioner does not determine whether the income can be split when the income itself is eligible. However, age can affect whether certain types of pension income, such as RRIF payments, qualify for splitting.
Form T1032 – Joint Election to Split Pension Income
Both spouses or common-law partners must complete and agree to the pension income split.
The election is made using:
Form T1032 – Joint Election to Split Pension Income
The form determines the amount of eligible pension income being allocated from the pensioner to the spouse or common-law partner.
The pension income and related tax withheld at source must be allocated in the appropriate proportion.
What Happens to Tax Withheld?
When pension income is split, the income tax withheld at source from the eligible pension income must also be allocated between the pensioner and the spouse or common-law partner.
The tax withheld is generally allocated in the same proportion as the pension income being split.
This ensures that the income and related tax amounts are properly reflected on both tax returns.
Example of Pension Income Splitting
Wayne is 55 years old and married to Suzy, who is 50. Wayne receives a company pension of $82,000 during the year, and $18,040 of income tax was deducted at source.
Suzy has no income.
Wayne can choose to split up to 50% of his eligible pension income with Suzy.
If Wayne chooses to split the maximum amount:
| Item | Amount |
|---|---|
| Wayne's original pension income | $82,000 |
| Maximum pension income that can be split | $41,000 |
| Amount remaining with Wayne | $41,000 |
| Amount allocated to Suzy | $41,000 |
Suzy reports the allocated amount as pension income, while Wayne claims the corresponding pension income split deduction.
Both Wayne and Suzy must complete and sign Form T1032.
Since Suzy has little or no other income, splitting the pension may reduce the couple's overall tax payable.
Why Pension Income Splitting Should Be Reviewed Carefully
Pension income splitting does not always produce the same tax savings for every couple. A tax professional should consider the complete tax situation of both individuals before deciding how much income to split.
Some important factors include:
- Tax brackets of both spouses or partners.
- Old Age Security (OAS) recovery tax.
- Pension income tax credit.
- The taxpayer's wishes and financial circumstances.
- Age-related tax credits.
- Provincial or territorial tax rates and health premiums.
- Other investment and employment income.
- Other tax credits, including disability-related credits.
- Nursing home or other senior care costs that may be affected by income.
Tax software can often calculate and optimize pension income splitting. However, the tax preparer should still review the results to make sure the split is appropriate for the taxpayer's overall circumstances.
Pension Income Splitting and Tax Planning
The main benefit of pension income splitting is that it can help distribute income more evenly between spouses or common-law partners.
For example, if one spouse has a high amount of eligible pension income while the other spouse has little or no income, splitting the pension may allow some of the income to be taxed at the lower-income spouse's marginal tax rate.
However, the decision should not be based only on immediate tax savings. Pension splitting can also affect income-tested benefits, credits, and other tax calculations.
Deadline for Pension Income Splitting
The pension income splitting election is generally made with the tax returns for the applicable year.
If a taxpayer needs to change or amend a pension income split, special rules apply to the deadline for making or changing the election. Generally, an election or amendment can be made by December 31 of the third calendar year after the tax return filing deadline for the year in question, subject to the applicable rules.
Taxpayers should keep a copy of Form T1032 and supporting documents with their tax records.
Key Takeaways
Pension income splitting can be a useful tax-planning strategy for eligible Canadian couples. Before making an election, remember that:
- Up to 50% of eligible pension income can generally be allocated to a spouse or common-law partner.
- Both individuals must agree to the pension split.
- Form T1032 is used to make the joint election.
- CPP, QPP, and OAS payments do not qualify for pension income splitting.
- Tax withheld from the pension income must be allocated in the appropriate proportion.
- Pension splitting can affect tax credits, benefits, and income-tested programs.
Final Thoughts
Pension income splitting can help Canadian couples manage their retirement income and potentially reduce their overall tax burden. However, the decision should be based on the tax situation of both spouses or common-law partners.
Before completing a pension split, consider eligible pension income, tax brackets, government benefits, available credits, and provincial tax considerations. A careful review can help ensure that the pension split provides the intended tax benefit without creating unexpected consequences elsewhere on the tax return.
Posted on 10 August, 2026