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Pension income splitting is a tax savings strategy designed to lower a couple’s overall family tax bill, leaving more disposable income. When filing their annual income tax returns, a couple can jointly elect to shift up to one-half of eligible pension income from the spouse in a higher tax bracket to the spouse in a lower tax bracket, which shifts the associated income tax liability. Tax savings are derived from the difference in the couple’s tax brackets multiplied by the amount of income shifted. In addition, if the pension income allocated to the lower income spouse results in the ability to claim the Pension Income Tax Credit for which he or she would otherwise not qualify, additional savings result.

To qualify for pension income splitting, a couple is defined as two individuals who are married or in a common-law partnership. A relationship breakdown would disqualify the couple from undertaking this strategy. A breakdown in the relationship is defined as one where the couple is living separate and apart from each other at the end of the year and for a period of 90 days or more beginning in the year. However, couples living apart at the end of a year because of medical, educational, or business reasons would not be disqualified. The couple must be residents of Canada on December 31.

The definition of eligible pension income depends on the age of the spouse in receipt of the income.

For Canadians who are age 65 or older by the end of the year, eligible pension income includes:

  1. Registered pension plan (RPP) payments
  2. Registered retirement income fund (RRIF) payments
  3. Life income fund (LIF) payments
  4. Locked-in retirement income (LRIF) fund payments
  5. Lifetime annuities from registered plans, i.e. registered annuities
  6. Interest portion of non-registered annuities, prescribed and non-prescribed

For Canadians who are less than age 65 at the end of the year, eligible pension income includes:

  1. Registered pension plan payments
  2. Plus any of the items from (2) to (6) of the above list if received as a consequence of the death of the spouse.

It is important to note that only periodic payments qualify as eligible pension income. In addition, Canada Pension Plan (CPP) and Old Age Security (OAS) are not included in the list of eligible pension income amounts.

Consider the example of Ben and Barnie.

  • Common-law partners, Ben and Barnie, are ages 67and 64 respectively.
  • Ben is in receipt of $60,000 of RRIF income, $8,000 of Canada Pension Plan retirement pension, $6,000 of Old Age Security and no investment income.
  • Barnie is in receipt of $40,000 of interest income, $6,000 of Canada Pension Plan retirement pension and $6,000 of Old Age Security. While Barnie holds an RRSP, he has not as yet taken any income out of the plan.
  • Ben can shift up to $30,000 of his $60,000 of RRIF income to Barnie’s tax return. However, he would likely choose to shift $11,000, which would leave each of them with $63,000 of taxable income.
  • While shifting $11,000 of RRIF income from Ben to Barnie has made their taxable incomes equal, their final income tax liabilities will probably be different because Ben qualifies for the pension income credit and the age amount credit, both of which are available to taxpayers age 65 or older.

Eligibility for the pension income tax credit utilizes similar rules to those used for pension income splitting.

The availability of the pension income credit is based on the individual’s age and the type of pension income. In Ben and Barnie’s case, Barnie is not yet age 65 and therefore not entitled to the pension income credit nor the age amount credit.

To initiate this strategy, the spouse whose income is to be split completes and files the election (CRA Form T1032) with his or her annual income tax return. Both spouses must sign the form to acknowledge the split. This is an annual election, which provides the couple with the opportunity to re-evaluate their income situation annually and structure the split to meet their ongoing needs. Because the election is filed by the income tax filing due date, it provides the couple with time to evaluate their respective incomes and optimize the election each year. Completion of the form requires a splitting of taxes withheld at source on the eligible pension income.

It is interesting to note that the strategy results in one spouse paying an increased amount in income taxes without actually receiving any of the pension income. Legal entitlement to the pension income remains with the first spouse even though the liability to pay income taxes shifts to the other spouse. The couple is jointly and severally liable for any amounts of tax, interest and penalties that arise as a result of filing the election.

Splitting pension income is a valuable strategy for couples because it allows them to lower their combined income tax liability, resulting in more after-tax cash flow to meet their retirement needs.

E.O. & E.


This commentary is published by the Institute in consultation with an editorial board comprised of recognized authorities in the fields of law, life insurance and estate administration.

The Institute is the professional organization that administers and promotes the CLU and the CHS designations in Canada.

The articles and comments are not intended to provide legal, accounting or other device in individual circumstances. Seek professional assistance before acting upon information included in this publication.

Advocis*, the Institute for advanced financial education.

(The Institue”), CLU, CHS, FHF.C and APA are trademarks of the financial advisors Association of Canada (TFAAC).

The institute is a wholly-owned subsidiary of Advocis. Copywrite TFAAC. All rights reserved. Unauthorized reproduction of any images or content without permission is prohibited.

Copywrite  ISSN 0382-7038

Contributors to this edition:

James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.

About The Author

Mark Schneider
Mark Schneider is one of Canada's leading Chartered Financial Planners. For over 30 years he has helped hundreds of regular Canadian families grow small fortunes through consistent planning and wise advice. He holds the following designations: CFP, CLU, CHFC, CFSB

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