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Pension income splitting

Canadian tax is charged per person, so a couple with one high pension income and one low one pays more than a couple with the same total split evenly; see taxes are per person. Pension income splitting is the one common tool that moves income between spouses on the return. Both file a joint election, the higher-income pensioner transfers part of their eligible pension income, and the other spouse reports it.

The rules

  • Up to 50% of the transferring spouse's eligible pension income can be allocated.
  • At 65 or older at year end, eligible income is a registered pension plan life annuity, RRIF or LIF payments, RRSP annuity payments and other annuities.
  • Under 65, only an RPP life annuity (or amounts received on a spouse's death) is eligible.
  • CPP, OAS and GIS are never eligible. CPP can instead be shared through a separate application to Service Canada.
  • Both spouses must be resident in Canada at year end and not living apart for 90 or more days because of a breakdown.
  • Tax withheld on the transferred income is allocated in the same proportion.
  • Each spouse can claim the pension income amount on what they report, if it qualifies: the lesser of $2,000 federally and the eligible pension income, and $1,796 for Ontario.

Splitting can also reduce the OAS recovery tax for the higher earner, because the recovery test is on individual net income. Moving too much can raise the recipient's own tax or recovery tax.

What the engine does

  • Accepts a joint election in a plan, with a fraction of at most one half, applied in every year both spouses are assessed.
  • Deducts the transferred share from the transferor and adds it to the recipient, moves the withholding on it with the income, and gives the recipient the pension amount on it when they are 65 or older, or when an RPP life annuity is attested.
  • Allows one election per person; chains and reciprocal elections are refused.

What it deliberately does not

  • It does not choose the best fraction. The election is an input, and the figure is a plain fraction of eligible income, with no proration for a part-year partnership.
  • The planner does not currently ask for an election, so projections show no splitting unless one is supplied to the engine.
  • Transfers of unused age, pension or disability amounts between spouses are not modelled.
  • Spousal RRSPs, which move income before retirement, are not modelled.

Connected to

  • RRIFs and the wind-up at 71 · An RRSP must become a RRIF by the end of the year you turn 71, after which a prescribed minimum comes out and is taxed every year. Give a birth year and the plan models it; leave it blank and a plan running past 71 looks better than it is.
  • Taxes are per person · Canada has no joint return, so each of you is taxed on your own income with your own brackets and credits. The routes that do move income between partners — pension splitting, spousal RRSPs, prescribed-rate loans — are not modelled, so a couple's real bill may be lower than this.
  • The OAS recovery tax · Years where net income clears the threshold repay 15% of the excess out of Old Age Security. The projection withholds it from the OAS cash, exactly as the CRA does, and leaves taxable income unchanged.

Sources