Pension Income Splitting: Complete Guide

How Pension Splitting Works

Pension splitting is a tax calculation strategy, not an actual transfer of money:

• The higher-income spouse reports less pension income
• The lower-income spouse reports more income
• The actual pension payment goes to the same person
• Both spouses must agree and file Form T1032

Who Can Split Pension Income?

To be eligible:

• You must be married or in a common-law relationship
• You must both be Canadian residents on December 31
• You must not have been separated for 90+ days due to relationship breakdown
• You must have eligible pension income

Eligible Pension Income

If 65 or Older

Can split:

• Registered pension plan (RPP) payments
• RRIF withdrawals
• RRSP annuity payments
• Life income fund (LIF) payments
• Deferred profit sharing plan (DPSP) annuity
• Foreign pensions (reported in Canadian income)

If Under 65

Can split:

• Life annuity payments from RPP
• Certain payments due to death of spouse

Cannot split RRIF income until age 65.

Never Eligible

• CPP/QPP benefits (separate splitting rules)
• OAS payments
• RRSP lump-sum withdrawals (not annuity)
• Retiring allowances
• Death benefits
• Salary or employment income

Maximum Split Amount

You can allocate up to 50% of eligible pension income to your spouse. The optimal split amount depends on:

• Each spouse's marginal tax rate
• Total eligible pension income
• OAS clawback considerations
• Age-related credits

Example Savings

Without Splitting

John has $80,000 pension income, Mary has $20,000:

• John's federal tax: ~$12,500
• Mary's federal tax: ~$2,100
• Total federal tax: ~$14,600

With Splitting (50%)

John reports $60,000, Mary reports $40,000:

• John's federal tax: ~$8,600
• Mary's federal tax: ~$4,700
• Total federal tax: ~$13,300

Federal savings: ~$1,300 (plus additional provincial savings)

OAS Clawback Benefits

OAS is reduced (clawed back) when income exceeds ~$86,912 (2024). Pension splitting can help avoid this:

• Reduces the higher earner's net income
• Can keep both spouses below the clawback threshold
• Each spouse receives full OAS

Pension Amount Tax Credit

The receiving spouse may now qualify for the pension amount credit:

• Up to $2,000 in pension income qualifies
• Worth about $300 in federal tax savings
• If receiving spouse had no pension income before, this is a bonus

Form T1032

Both spouses must complete and sign Form T1032 (Joint Election to Split Pension Income):

• File with both spouses' tax returns
• Must be signed by both spouses
• New election required each year
• Can choose different split percentage each year

Optimal Split Percentage

50% isn't always optimal. Consider:

Calculate Both Scenarios

• Run tax calculations with various split percentages
• Consider impact on credits, clawbacks, and benefits
• Tax software usually optimizes automatically

Factors Affecting Optimal Split

• Each spouse's other income sources
• Age difference between spouses
• Provincial tax brackets
• Medical expense credits (3% of net income threshold)
• Age amount credit phase-out

CPP Splitting: Different Rules

CPP/QPP has separate sharing rules:

• Must apply to Service Canada
• Based on years living together during contributions
• Actual payments are redirected (not just tax treatment)
• Can be combined with pension splitting for RRIF income

Impact on Other Benefits

For the Pensioner (Transferring)

• Lower net income may increase GIS eligibility
• May preserve age amount credit
• May reduce OAS clawback

For the Receiving Spouse

• Higher income may reduce age amount credit
• Could affect provincial benefits
• May impact spousal RRSP contribution room

Common Mistakes

• Forgetting to file T1032: Both returns rejected without it
• Mismatched forms: Both spouses must show same amount
• Splitting ineligible income: Only specific pension types qualify
• Not recalculating annually: Optimal split changes with income
• Assuming 50% is best: Lower percentage may be optimal

Planning Strategies

Convert RRSP to RRIF Early

If you turn 65 before your spouse, consider converting RRSP to RRIF. RRIF income is eligible for splitting at 65.

Coordinate with Spousal RRSP

Spousal RRSP attributions don't affect pension splitting—consider both strategies together.

Review Annually

Income changes year to year. Recalculate the optimal split each tax season.

Tax Software and Splitting

Most tax software can:

• Calculate optimal split percentage
• Generate Form T1032
• Show tax savings from splitting
• Account for related credits and clawbacks