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Pension Income Splitting Opportunities Require Careful Planning Now

Taxpayers in receipt of qualifying pension income in 2008 will be able to split up to 50% of that income with their spouse or common law partner. There is no age restriction for partner who will be reporting the split pension income and some interesting potential new outcomes and pitfalls in developing tax efficient strategies arise in maximizing the opportunity for each household.

Following are some facts for you to consider in planning to use this new transfer which should be covered off when pre-retirees come in for tax preparation assistance in the next few months. In cases where pension benefits are currently being drawn by one or both spouses, a phone call to evaluate pension splitting opportunities now before the busy tax season gets under way will be appreciated by clients.

  • Qualifying pension income recipients must be resident in Canada and allocate split income to spouses (or common-law partners) resident in Canada.
  • Amounts allocated to be split will be deducted from the income of the recipient and added to the income of the spouse to whom the amount is allocated.
  • Both persons must agree to the allocation.
  • The allocated amount will be treated as the spouse’s income for all purposes of the Act. Splitting may therefore not only reduce current taxes but may increase access to the OAS and means-tested refundable and non-refundable credits
  • Pension income allocated will qualify for the pension income amount on the return of the recipient of the allocation.
  • Eligible pension income includes the following:
    • A. For individuals aged 65 years and over:
    • Pension benefits from a registered pension plan (RPP),
    • Annuity income from a registered retirement savings plan (RRSP),
    • Payments under a registered retirement income fund (RRIF).
    • B. For individuals under 65 years of age income from pension benefits from a registered pension plan or any of the other amounts described above received as the result of the death of a spouse.

Ineligible amounts: Benefits from public pension plans like the OAS and CPP, certain RCAs (Retirement Compensation Arrangements).

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