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Pension Splitting

For many retired individuals, one of the most important tax planning strategies is to split pension income with their spouse. There may be an opportunity to split Canada Pension Plan, but this will result in more modest savings.

Regular Pension Income – In order to split pension income, both spouses or common-law partners must make a joint election on Form T1032, Joint Election to Split Pension Income and submit it with their tax returns. An individual can elect to split up to 50% of the eligible pension income. Since income tax is withheld at source on pension income, it must also be allocated between spouses on the same proportion as the pension income is allocated.

There are two opportunities to reduce taxes based on the splitting of pensions. Since a portion of the higher income spouse’s pension income is transferred to the other spouse, that income is taxed at a lower rate, resulting in a reduced family tax expense. Secondly, there is a pension credit of $2,000, but it can only be claimed against pension income. If only one spouse has income from a pension, by transferring a portion of the pension to one’s spouse, both spouses can claim the credit of $2,000.

Individuals can split payments from an employer pension plan regardless of the age of the recipient. Once an individual reaches the age of sixty-five, payments from RRIFs and annuity payments will also qualify. Payments from Canada Pension Plan and Old Age Security do not qualify for income splitting.

Canada Pension Plan – There are limited income splitting possibilities with Canada Pension Plan payments. In order to share pensions, both spouses must be at least 60 years of age and agree to share their pension with each other. Spouses are allowed to share Canada Pension Plan payments based upon the amount of time they lived together as spouses. If a couple lived together for 75% of the period when they contributed to the Canada Pension Plan, they could share 75% of their monthly payments. If both individuals were receiving the maximum benefit, there would be no advantage to this strategy. This strategy is effective when one spouse receives the maximum monthly CPP pension and the other had either insufficient income or number of years in the workforce to achieve the maximum payment. By sharing the CPP, pension income can be transferred to the low-income spouse.

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