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Pension Income Splitting: 10 Questions & Answers

30 January 2017 by National Bank
Pension income splitting

Transferring a portion of your retirement income to your spouse in order to pay fewer taxes…sounds pretty good, right? But it must be done properly! Here’s everything you need to know about pension income splitting.

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1. How does pension income splitting work?

This tax transaction consists of allocating (without a real transfer of money) a portion of your pension revenue to your spouse who has a lower income.

2. Why choose to split your pension income?

Since the tax rate is progressive at both the provincial and federal levels, the transfer of a portion of the income from the transferring spouse to the receiving spouse permits a couple to reduce the total amount of tax they pay to the government.

In fact, if the amount transferred allows the higher earning spouse to move to a lower tax bracket - where he or she pays a lower proportion on each dollar in tax - without the spouse who earns the least changing to a higher tax bracket, the couple will save more on their taxes.

3. Is pension income splitting going to benefit me?

The greater the difference in income (before splitting) between spouses, the more this approach will work to your advantage.

A good way of investigating this option is to do a simulation using tax software or with the help of an accountant.

4. How does income splitting actually work?

After having determined the optimal amount to transfer according to your situation, spouses must complete the federal T1032 form and Schedule Q in Quebec, specifying which spouse is the transferee and which is the recipient of the transfer as well as the amount of the transfer.

These forms, once completed, must be submitted with the tax returns for both spouses.

5. Starting at what age are you entitled to split pension income?

In Quebec, a spouse who transfers part of their income to another must be 65 years old (or older) by December 31st of the tax year in question. The age of the spouse to whom this income is credited does not matter.

However, some types of income are exempt from this rule. This is the case for certain eligible retirement incomes that were received as a result of the death of the spouse who received them. This income may be transferred to the spouse even if the transferor is under 65 years of age. (A more detailed explanation can be found on Revenue Canada’s website).

6. Is pension income splitting limited to spouses or can it be applied to other family members?

Pension income splitting is only permitted between spouses or common-law partners who have been living together for at least one year and were not separated for more than 90 days at the end of the taxation year.

There are other forms of income splitting that may apply to other family members but this is not the case for pension income splitting.

7. Is there a limit to the amount that can be transferred from one spouse to another?

Yes. The maximum transferable amount is equal to 50% of the eligible income of the spouse making the transfer.

8. Which income is eligible for pension income splitting?

  • Income from a Registered Pension Plan (RPP)
  • Annuity payments purchased through a Registered Retirement Savings Plan (RRSP)
  • Revenue from a Registered Retirement Income Fund (RRIF)
  • Annuity payments purchased through a Deferred Profit-Sharing Plan (DPSP)
  • Taxable benefits of a Pooled Registered Pension Plan (PRPP)
  • The life annuity resulting from a retirement agreement.

9. Which income is not eligible?

  • Canada Pension Plan (CPP) benefits
  • Benefits under the Québec Pension Plan (QPP)
  • Old Age Security (OAS)
  • Withdrawals from an RRSP (other than annuity payments)
  • Revenue from an American Individual Retirement Account (IRA)

10. If pension income splitting is used, how are the installments calculated?

In order to avoid having to pay fines, it’s better to stick to the installment amounts calculated for you by the government, even if you receive a refund after doing your tax return.

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