The Canadian government introduced pension income splitting in 2007, aimed at helping income split amongst spouses or common-law partners. It allows a fair distribution of one spouse’s pension income between the two, though it’s vital to underscore that this split is merely symbolic and involves no actual transfer of funds.
A question often raised is, what happens when both partners receive a pension income? Annually, just one spouse has the option to split their pension income. The engaging aspect of this setup is its flexibility. The selection doesn’t have to be set in stone and can vary yearly. Moreover, the proportion of income split is adjustable, empowering couples to select the best course for their unique circumstances.
What makes this method advantageous? This approach serves as a compelling tax strategy in a nation where those with higher earnings shoulder a more significant income tax burden. It allows the higher-earning spouse to lessen their tax obligation by sharing up to half their pension income with their partner.
The rewards extend beyond simple tax cuts. Pension income splitting has the potential to amplify the Pension Income Tax Credit for the spouse earning less or even render it accessible to them. To leverage this benefit, the pension-receiving spouse must be younger than 65. As an illustration, the lower-income spouse could report $10,000 in pension income, claim the total Pension Income Tax Credit ($2,000), and diminish their federal income tax by $300. Additional perks may involve restoring Old Age Security benefits and Age Amount Credit by reducing or reducing clawback.
The Canada Revenue Agency classifies “qualified pension income” as eligible for splitting. This typically includes private pension income, such as a pension from a former employer. For those aged 65 and above, it also embraces payments from an RRSP or a registered income fund (RIF). However, the Canada Pension Plan (CPP), the Québec Pension Plan (QPP), Old Age Security payments, and income from a United States individual retirement account (IRA) are excluded.
To qualify, couples must not have lived apart for more than 90 days in a year due to a relationship breakdown, and both must be Canadian residents. Handy tax software like TurboTax further streamlines this procedure with its Pension Income Splitting Optimizer, built to simplify the required documentation.
There’s a silver lining for those who might have overlooked past opportunities for pension income-splitting. The CRA allows reassessment within three years from your Notice of Assessment date. You could furnish revised returns for the previous three years, incorporating pension income splitting.
Always consult a financial planner to determine the best strategy for pension income splitting before implementation.