Pension Income Splitting

August 20, 2021

Our Government knows that Canadians pay too much tax and that seniors, in particular, can often feel the burden of taxes the most. In an effort to provide Canadian seniors with more than $1 million in tax relief per year, our Government introduced the Tax Fairness Plan on October 31, 2006, which was included in Budget 2007. Part of this Plan is Pension Income Splitting that will help seniors keep more of their retirement savings.

Pension income splitting will begin in the 2007 taxation year. Canadian residents will generally be able to allocate up to one-half of their income that qualifies for the existing pension income tax credit to their resident spouse (or common-law partner) for income tax purposes. For income tax purposes, the amount allocated will be deducted in determining the income of the person who actually received the pension income and included in computing the income of the person to whom some or all of the pension income is allocated. Since it will in many cases increase the transferee’s tax payable, both persons must agree to the allocation in their tax returns for the year in question.

The pension income that is allocated will retain its character and be treated as income of the lower-income spouse for all purposes under federal income tax rules. This means that some couples may now receive a second pension income tax credit where previously only one was available.

Pension income splitting doesn’t have any effect on how or to whom the pension income is paid. Therefore, it doesn’t involve the payer of the pension. Information slips will be prepared and sent to the recipient of the pension income in the same manner as previous years.

A pension recipient (pensioner) and his or her spouse or common-law partner can elect to split the pensioner’s “eligible pension income” received in the year if:

• they are married or in a common-law partnership with each other in the year and are not, because of a breakdown in their marriage or common-law partnership, living separate and apart from each other at the end of the year and for a period of 90 days commencing in the year; and
• they are both residents in Canada on December 31st; or

- if deceased in the year, resident in Canada on the date of death; or
- if bankrupt in the year, resident in Canada on December 31st of the calendar year in which the tax year (pre- or post-bankruptcy) ends.

Eligible pension income under pension income splitting is generally the total of
the following amounts received by the pensioner in the year (these amounts also qualify for the pension income amount):

• the taxable part of annuity payments from a superannuation or pension fund or plan; and
• if received as a result of the death of a spouse or common-law partner, or if the pensioner is age 65 or older at the end of the year:

- annuity and registered retirement income fund (including life income fund) payments; and
- Registered Retirement Savings Plan annuity payments (please note that Old Age Security and Canada or Quebec Pension Plan payments do not qualify).

A pensioner and his or her spouse who elect to split eligible pension income have to make a joint election in the prescribed form with their income tax returns for the year on or before their filing due date (generally April 30 of the year following the tax year, or June 15th, if self-employed). The new Form T1032, Joint Election to Split Pension Income, will be available by January 2008. The 2007 income tax return will include a new line for the pensioner to deduct the amount of pension allocated to the spouse or common-law partner. A new line will also be added for the spouse to report the allocated pension income.

The Tax Fairness Plan has been designed to help the most vulnerable seniors. Pension income splitting is a major positive change in tax policy for pensioners providing $675 million of tax relief for the 2007 taxation year. It’s just one more way our Government is getting things done for senior citizens.