Pension Income Splitting: Questions & Answers

What does it mean to split your retirement income?

It's a tax transaction that involves allocating (without actually transferring money) a portion of your retirement income to your spouse whose income is lower than yours. 

The two amounts added together equal the same thing. However, income splitting can be very profitable because the strategy is based on each individual’s tax rate, not the total sum. Remember that with higher taxable income, you could be in a higher tax bracket. So, transferring a portion of one spouse’s income (the spouse who has more) to the spouse who has less can allow the couple to reduce the taxes they pay.

Of course, there are rules to follow and the scenario described above is just an example to illustrate the concept of income splitting. However, it’s worth looking at in more detail. Also, just because you make this choice one year doesn’t mean you have to do it for the following years. It’s a choice you can make every year, allowing people who are eligible to reduce the couple’s overall tax bill.

There are other formulas for income splitting that can apply to other family members, but that’s not the case for splitting retirement income, including your pension.

Is there a limit to the amount that can be transferred from one spouse to the other?

Yes. The maximum amount that can be transferred to one spouse is 50% of the eligible income of the spouse making the transfer.

How do you know if income splitting is right for you?

In general, the greater the difference in income (before splitting) between spouses, the more this strategy will help you save.  A good way of checking whether this is a good strategy for you is to simulate income splitting using tax software or by talking to an accountant or financial planner. You should repeat the exercise every year. People’s situations change and just because it wasn’t worth it last year doesn’t mean it won’t be beneficial the following year, and vice versa.

It’s important to note that not all retirement income can be split between spouses. There are specific rules based on the type of retirement income received, your age, and other criteria.

Who is entitled to income splitting at retirement?

At the federal level, you can continue to split income with your spouse, regardless of your age, as long as the retirement income is eligible. The couple must be living together for at least one year and not have been separated for more than 90 days at the end of the tax year (with some exceptions).

However, in Quebec for example, the spouse who transfers a portion of their eligible income to the other spouse must be age 65 or over by December 31 of the tax year concerned. The province no longer allows retirement income splitting for people under age 65.

To find out more and get personalized advice, we recommend you consult a tax professional. 

Which retirement income is eligible for income splitting?

Retirement income that is eligible for income splitting depends on the age of the pensioner. Here’s a brief overview:

For those 65 or older:

• Income from a registered pension plan (RPP)
• Annuity payments purchased through a Registered Retirement Savings Plan (RRSP)
• Income from a Registered Retirement Income Fund (RRIF)
• Annuity payments purchased through a Deferred Profit Sharing Plan (DPSP)
• Taxable benefits from a Pooled Registered Pension Plan (PRPP)
• Life annuity from a retirement agreement

Those younger than 65 can still benefit from the RPP, regardless of the applicable pension legislation. However, please note that in Quebec, no pension income splitting is eligible for individuals under 65.

For more information, visit the Canada Revenue Agency's website (external link) to help determine whether your pension income is eligible for splitting.

What types of retirement income cannot be split?

Here are a few examples:

• Canada Pension Plan (CPP) benefits
• Quebec Pension Plan (QPP) benefits
• Old Age Security (OAS) pension benefits
• RRSP withdrawals (other than annuity payments)
• Income drawn from a U.S. Individual Retirement Account (IRA).

More specifically, how do you split your income?

After determining the ideal amount to transfer based on their situation, spouses must fill in federal tax form T1032 (Schedule Q in Quebec), stating which spouse is making the transfer, which is receiving the transfer and how much it is.

These duly completed forms must be submitted with both spouses’ tax returns.

If you’re in a new relationship, your income splitting will be prorated based on the period of year where you had an eligible spouse. Eligibility criteria include being in a common-law relationship and living together for at least 12 consecutive months, marriage, parenthood or custody of children.