What is a Pension Split?
On paper, you can transfer a portion of your pension to your spouse if they have a lower income to reduce your taxes owing/taxes payable. Every year you can decide based on income if this is something you should do to lower your taxes owing.
Retirees receive pensions from multiple sources such as Registered Retirement Pension Plan (RRSP), Pooled Registered Pension Plan (PRPP), Registered Retirement Income Fund (RRIF), Canada Pension Plan (CPP), Old Age Security (OAS), or from a non-registered plan. If you receive a larger pension than your spouse or common-law partner, it may be beneficial to transfer over a portion of your income on your tax return. This technique reduces your taxable income by shifting a portion to the lower-earning partner, thus reducing your overall tax burden as a retired couple or household.
Which pension income is eligible for splitting depends on both the age of the pensioner and the type of pension received.
Pension payments from programs such as CPP (Canada Pension Plan) and OAS (Old Age Security) are not eligible for pension splitting regardless of age. Lump-sum pension payments, foreign pension, and non-registered pension plans are not eligible for pension splitting. Pensioners are divided into three different categories:
- People 65 or older as of December 31st of the tax year
- People under 65 as of December 31st and are receiving pensions due to the death of their spouse or common-law partners
- People under 65 as of December 31st and are receiving pensions NOT due to the death from their spouse or common-law partners
How much can be split?
You may transfer up to 50 percent of your pension to your spouse or common-law partner.
How to split your pension income,
You and your spouse or common-law partner must complete a Form 1032 — Joint Election to Split Pension Income. The form has to be signed by both parties and be available upon request by CRA.
When you transfer some of your pension income, your taxes paid which are associated with the transferred amount will be reduced and transferred on the transferee’s income return.
Pension Income Amount
When you report eligible pension income, you may be entitled to an additional credit called Pension Income Amount of up to $2000. Pension splitting may qualify a spouse who doesn’t directly receive pension income to claim this extra amount as well.