Income Splitting 101

If you or your partner receive qualified pension income, the federal government’s pension income-splitting provisions could mean extra money in your pocket when you file your income tax returns.

In a nutshell, pension income splitting allows couples to potentially reduce their overall tax bill by shifting income from one partner (the higher income earner) to the other (the lower income earner) who is taxed at a lower rate. This is just an allocation for tax reporting purposes and the actual income does not have to be paid to the partner.

Achieving the optimal split

Pension income splitting can be an effective tax-minimization strategy for many Canadians, but before you dive in, you should talk with your advisor to get a good understanding of the potential limitations and tax implications to ensure the optimal “split” is made. Both you and your partner must be Canadian residents and living together as a married or common-law couple to be eligible. Up to 50% of qualified pension income can be split. The type of income which qualifies for pension income splitting is different if you are under 65 years of age or over, but generally includes pension, annuity, RRIF (including life income funds, locked-in retirement income funds and prescribed RRIF income), and RRSP annuity payments. In terms of potential tax implications, pension income splitting may have an impact on the following tax calculations:

Quarterly tax installments – If you split income, you might have your quarterly tax installment payments reduced or eliminated. But your spouse may now have to start or increase their installment payments.

OAS and Age Credit clawbacks – By splitting income, you may be able to reduce or eliminate these clawbacks. But your spouse may start having them.

Spousal credit – Could be reduced or eliminated if you pension income split. But your spouse will be able to claim their own basic personal credit if they have to file a tax return.

Medical expense credit – By increasing the income of the lower taxed spouse, are you reducing the amount available for this credit? Does it save taxes overall?

Pension income credit – If your spouse doesn’t have pension income, pension income splitting can be advantageous as it may allow your spouse to claim this credit.