Pension Income Splitting: The Couple's Tax Break
Canadian couples can split up to 50% of eligible pension income with their spouse, potentially saving thousands in taxes. Here's what qualifies, how it works, and how to maximize the benefit.
How Pension Splitting Works
Since 2007, Canadians can allocate up to 50% of eligible pension income to their spouse for tax purposes. The income doesn't actually change hands—it's just reported differently on your tax returns. The goal is to equalize income between spouses to take advantage of lower tax brackets.
What Income Qualifies?
Not all retirement income is eligible. The rules depend on your age:
| Income Type | Under 65 | 65 and Over |
|---|---|---|
| RRIF/LIF withdrawals | No | Yes |
| Annuity from RRSP/DPSP | No | Yes |
| Registered pension plan (RPP) | Yes | Yes |
| CPP/QPP | No* | No* |
| OAS | N/A | No |
| RRSP withdrawals | No | No |
*CPP/QPP has its own sharing mechanism—see below.
Key insight: If you're under 65, only defined benefit pension income qualifies. Once you turn 65, RRIF income becomes eligible—a major planning opportunity.
The Math: How Much Can You Save?
The savings depend on the tax rate difference between spouses. If one spouse is in the 40% bracket and the other is in the 20% bracket, shifting $30,000 of income could save:
$30,000 × (40% - 20%) = $6,000 in tax savings
The optimal split isn't always 50%—it's whatever equalizes your marginal rates or achieves your specific goal (like avoiding OAS clawback for one spouse).
CPP Sharing: A Different Mechanism
CPP can't be split using the pension income splitting rules, but couples who both receive CPP can apply for CPP sharing. This allows you to share CPP benefits based on your time together during contribution years.
Unlike pension splitting, CPP sharing:
- Requires an application to Service Canada
- Must be based on time living together
- Applies to future payments (can't be done on tax returns)
Provincial Considerations
Pension splitting affects both federal and provincial taxes. The savings can vary by province due to different bracket thresholds. In provinces with high tax rates (like Quebec or Nova Scotia), the savings can be particularly significant.
Common Mistakes
- Splitting too much: If you shift income to a spouse who loses age credit or other benefits, you might come out behind
- Forgetting about OAS: Sometimes the goal isn't tax minimization—it's keeping one spouse below the OAS clawback threshold
- Not considering both returns: You must file jointly (same election on both returns) and consider the net household impact
How Talk Through Wealth Helps
Finding the optimal split requires modeling both spouses' complete tax situations:
- Calculate the ideal split percentage (not always 50%)
- Factor in OAS clawback thresholds
- Consider age credits and other benefits
- Compare different scenarios side by side
- Optimize across federal and provincial taxes
Optimize Your Pension Split
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