Spouses or common-law partners may qualify to split eligible pension income. Pension income splitting can significantly reduce combined income taxes payable when one spouse is in a higher tax bracket than the other spouse.
You must meet the following three requirements to qualify for pension income splitting:
You have a spouse or common-law partner and are not living separate and apart from each other, because of a breakdown in your marriage or common-law partnership, at the end of the tax year and for a period of 90 days or more beginning in the tax year.
You and your spouse or common-law partner were residents of Canada on December 31st of the year.
You received eligible pension income in the year that qualifies for the pension income tax credit.
Eligible pension income varies depending on whether the pensioner is under or over 65 years of age at the end of the year. Taxpayers under the age of 65 are eligible to split income from a registered pension plan, such as an employer sponsored defined benefit or defined contribution plan. These taxpayers are also eligible to split the taxable portion of foreign pensions. For taxpayers over the age of 65, many other types of pension income become eligible. This includes annuity payments from registered retirement savings plan, registered retirement income funds, life income funds, deferred profit-sharing plans, and retirement compensation arrangements. Certain types of pension income are not eligible for the split for all taxpayers, including Canada Pension Plan, Old Age Security, lump-sum payments from a registered retirement savings plan, and income from foreign pensions that is tax-free in Canada due to a tax treaty.
Qualifying individuals who receive eligible pension income can split up to 50% of the eligible pension income with their spouse or common-law partner. This is generally advisable if the pensioner is in a higher tax bracket. For example, a pensioner may receive eligible pension income in the amount of $50,000 during the year and is in the highest federal income tax bracket of 33% while their spouse is in the lowest federal income tax bracket of 15%. The pensioner can transfer pension income of $25,000 to their spouse resulting in total federal income tax savings of $4,500 ($50,000 × 50% × (33%—15%)). Any income tax deductions from the pension income will be split in the same proportion as the income.
Pension income splitting may result in tax savings even if the spouses are in the same tax bracket due to the pension income tax credit. Eligible pension income up to $2,000 qualifies for a non-refundable tax credit. Therefore, it is advisable to split a minimum of $2,000 in most situations where one spouse is receiving eligible pension income and the other is not. Pension income splitting is completed by submitting a joint election between the spouses. This election is completed as part of your annual tax returns.
Pension income splitting can greatly reduce your year-end tax bill. This should be assessed on an annual basis to see if it can benefit you.
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