Pension income splitting – the basics

Income splitting If you or your spouse receives eligible pension income during the year, you and your spouse can split or allocate the eligible pension income for tax purposes. Generally, you or your spouse can allocate an amount of 0% to 50% of the eligible pension income to the other spouse. In order to lower your family’s tax bill, the higher-income earner will generally allocate their eligible pension income to the lower-income earner.

 

You may be subject to withholding tax on the eligible pension income you receive. When you allocate eligible pension income that was subject to withholding tax to your spouse, a proportionate amount of the withholding tax is also allocated to your spouse. For example, consider an individual who receives pension payments from a company pension. They may be subject to withholding tax on these payments. If the individual chooses to allocate 40% of the pension payments to their spouse, 40% of the withholding tax on these payments would also be credited to the spouse. When the spouse files their tax return, the credit can be used to reduce their taxes payable or may result in a tax refund.

 

Who may benefit from pension income splitting?

These rules benefit couples where the primary recipient of the eligible pension income is subject to tax at a higher rate than their spouse. Married couples as well as those who satisfy the definition of common-law partners under the Income Tax Act qualify for pension income splitting. This includes same-sex couples.

 

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