Pension Income Splitting

Each January and February, there is a flurry of television, radio, and online advertisements and phone calls and e-mails from financial advisers and financial institutions encouraging Canadians to contribute to a registered retirement savings plan (RRSP) or a tax free savings account (TFSA). One thing you won’t see in all that activity is promotions or incentives to split pension income. In fact, the mention of such a tax-planning strategy will likely draw a blank look from most Canadians.

The reason that nobody is promoting pension income splitting is that it’s one of those rare tax-planning strategies which benefits absolutely no one but the taxpayer who uses it. In some cases, like RRSP or TFSA contributions (and likely soon, the benefits of pooled registered pension plans, or PRPPs), financial institutions explain and promote the benefits of such plans because it represents increased business for them. In other cases, the government advertises or promotes programs which advance economic policy objectives, like investments in lagging sectors of the economy or depressed areas, or which further social policy goals. But pension income splitting remains a relatively unknown tax planning strategy.

That’s unfortunate for a couple of reasons. First, the splitting of pension income can provide significant tax savings to those able to utilize it—those people generally being older taxpayers who in many cases are living on a fixed income and can really benefit from the tax savings received, especially in the current low interest rate environment. Second, unless you’re getting good tax planning advice, it’s very easy to overlook pension income splitting as a way of reducing your tax burden. The only references to pension income splitting on the annual return are two entries, one on line 116 and the other on line 210 and, unless you are already aware of the significance of those entries, there’s really nothing to alert you to it. The Income Tax and Benefit Guide provides very little in the way of explanation and no indication at all of the benefits which may be obtained. In addition, the form which must be filed with the return to effect a pension income splitting strategy (Form T1032) isn’t part of the standard tax return package provided to taxpayers by the Canada Revenue Agency (CRA); taxpayers must obtain it separately.

The general rule is that taxpayers receiving private pension income (including a pension received from a former employer and, where the recipient taxpayer is over the age of 65, payments from an RRSP or a registered retirement income fund) are entitled to split up to half that income with a spouse for tax purposes. (Government source pension income, like payments from the Canada Pension Plan or Old Age Security payments do not qualify for pension income splitting). A number of the provinces have also indicated that they will adopt the federal rules for provincial tax purposes.

The mechanics of pension income splitting are relatively simple. There is no need transfer any funds between spouses or to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify the pension plan administrator. In addition, the decision of whether and to what extent to split pension income for tax purposes does not have to be made until the return for the year is being completed. Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032, Joint Election to Split Pension Income, with their annual tax return.

For help with your tax return and pension income splitting call us in Bancroft, Belleville or Picton
613-332-2150 or 613-962-2151 or 613-476-2150