Pension Income Splitting

Individuals in receipt of eligible pension income can allocate or split up to 50% of the income with their spouse or common-law partner, and the allocated income is reported as the spouse’s taxable income. This allows the shifting of income from a higher-income spouse to a lower-income spouse, enabling the couple to reduce their combined income tax liability and increase cash flow during retirement.

This income splitting opportunity affords a significant benefit to married and common-law couples which is not available to others in a joint living arrangement (such as two retired siblings or two long-time friends). The choice to split pension income is made annually as an election when filing the couples’ personal income tax returns. Qualifying married and common-law couples have the opportunity to assess their overall income picture after the fact, offering maximum flexibility to optimize tax savings.

“Eligible pension income” that qualifies for pension splitting is a specifically defined term and is dependent upon the age of the individual receiving the payment.

If the individual is age 65 or over before the end of the year, eligible pension income is the total of:

  1. a life annuity payment out of a pension plan;
  2. an annuity payment from a registered retirement savings plan;
  3. a payment out of a registered retirement income fund;
  4. a periodic payment under a money purchase provision of a registered pension plan;
  5. a payment from a pooled pension plan;
  6. an annuity or periodic payment from a deferred profit sharing plan; and
  7. the taxable portion of a non-registered annuity payment.

If the individual has not attained the age of 65 before the end of the year, eligible pension income is the total of:

  1. a life annuity payment out of a pension plan (i.e., the same as (1) above for individuals 65 or over), and
  2. any of points (2) to (7) above if they are being received as a consequence of a death of a spouse or common-law partner.

As proposed in the 2012 federal budget, the definition of eligible pension income that can be split between spouses was expanded to include payments from a Retirement Compensation Arrangement (RCA). Where the recipient individual has attained the age of 65 some time in the year, the RCA amount which may be split is the lesser of:

  1. the total of all payments made in the year to the individual out of the RCA that provided benefits that supplement the benefits provided under a registered pension plan, and any payments in respect of a life annuity that is attributable to periods of employment for which benefits are also provided to the individual under the registered pension plan, and
  2. the amount, if any, by which the defined benefit limit (greater of $1,722.22 and one-ninth of the money purchase limit for the year) for the year multiplied by 35 exceeds the individual’s eligible pension income determined without reference to the RCA payment received.

It would appear from a careful reading of the RCA provision that pension splitting will be very restrictive and only allowed in cases where the RCA was set up to supplement a registered pension plan and meets the quantitative restrictions. As such, it would appear that there needs to be clear evidence of an existing registered pension plan in combination with the establishment of the RCA. This new provision has elements that are open to interpretation, which will take time to evolve.

It is important to understand that when spouses opt to split eligible pension income, it does not change the legal ownership of the income but it does change the income tax onus. As such, the pension recipient remains the legal owner of the income flow while the spouse with whom the pension recipient splits the income becomes responsible for the income tax liability that arises on the income allocated. Within the couple as a family unit, this should generally not be a problem but the issue should be addressed to ensure each individual’s cash flow is appropriate.

Pension income splitting is a highly valuable element of retirement planning because it offers retirees an opportunity to increase overall family after-tax income through a reduction of the combined income tax liability. Qualified individuals should assess the value of this strategy annually to optimize their financial well-being.

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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