The government generally frowns on income-splitting amongst family members. However, a specific rule in the Income Tax Act allows you to split certain pension income with your spouse or common-law partner.
The rule provides that you and your spouse can make a joint election, under which you split some of your pension income with your spouse. You can split any amount up to 50% of the income. The split amount is reported on your spouse’s tax return, while you report the other portion of the pension income. The election is annual, meaning that you can change the split amount for each taxation year, or you can choose not to split in any particular taxation year.
The split is allowed even if you do not actually transfer any of the pension income to your spouse.
Eligible Pension Income
The pension income must be “eligible pension income”.
In general terms, if you are 65 or older in the year, eligible pension income includes annuity income and periodic payments from a registered pension plan (RPP), payments from a pooled RPP, and payments out of a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF).
If you are under 65 at year-end, eligible pension income normally includes only “qualified pension income”, which means annuity income from an RPP. However, qualified pension income will also include the other pension payments described in the preceding paragraph if they are received as a consequence of the death of a former spouse (i.e. not your current spouse with whom you are splitting income).
Eligible pension income does not include income from government pensions such as the Canada Pension Plan, Quebec Pension Plan, or the Old Age Security.
Benefits of the Split
One benefit of the pension split occurs if you are in a higher marginal tax bracket than your spouse. The split will save you tax because the split amount will be subject to a lower tax rate.
A further benefit is the potential doubling of the pension credit. The federal credit is 15% of the first $2,000 of eligible pension income, while the provincial credit depends on the province of residence; the two credits together are worth up to about $450-$500 depending on the province. You can claim the credit, and assuming your spouse also qualifies, your spouse can also claim the credit. In this regard, the character of the pension income in your hands flows through to your spouse. For example, if the pension income is qualified pension income, your spouse can claim the credit even if he or she is under 65. If the pension income is one of the other types, your spouse can claim the credit only if he or she is 65 or over.
Example
You are 68 years old and receive RRSP income in the year that is not qualified pension income. You can elect to split up to 50% of the income with your spouse. You can claim the pension credit.
If your spouse is 65 or over, your spouse can claim the pension credit. If your spouse is under 65, he or she cannot claim the credit.
Another possible benefit relates to the Old Age Security (OAS) clawback tax. This is a tax that effectively requires you to repay some of your OAS benefits if your income exceeds a monetary threshold ($75,910 in 2018). The clawback tax is 15% of your net income in excess of the threshold, to a maximum of your OAS income. Therefore, if you would otherwise be subject to the clawback tax, you may be able to reduce or eliminate it if you pension split with your spouse.
In a similar vein, the age credit is phased out starting at $36,976 of income (2018 amount). Depending on your income, the pension split may allow you to reinstate some of your age credit.
Joint and Several Liability
Your spouse will be liable to pay the tax on the split amount that is included in his or her income. However, you will also be jointly and severally liable for that tax. This means that if your spouse does not pay the tax, the CRA can come after you to pay it