What is Pension Income Splitting?

August 8th, 2007

Since taking office, our Conservative Government has delivered unprecedented tax relief to seniors.

We doubled the pension income credit to $2,000 and increased the age credit amount by $1,000. These measures alone removed tens of thousands of seniors from the tax rolls. In other investments, we expanded the New Horizons for Seniors program by $10-million each year to expand capital assistance (community buildings, equipment and furnishings) related to seniors services and to combat elder abuse and fraud.

Yet the single most popular tax measure for seniors that we’ve introduced is pension income splitting. Based upon the number of calls to my office asking for clarification, I thought it would be helpful to provide some basic details below:

What is pension income splitting?

Canadian residents will be able to allocate up to one-half of their income that qualifies for the existing pension income tax credit to their spouse (or common-law partner) for income tax purposes.

The amount allocated is deducted from the net income of the person who received the pension income, and is included in the net income of their spouse or common-law partner.

Who qualifies?

A pension recipient (pensioner) and his or her spouse or common-law partner can split the pensioner's “eligible pension income” if they are married or in a common-law partnership with each other in the tax year and are not, because of a breakdown in their marriage or partnership, living separately at the end of the year and for a period of 90 days at the beginning of the year. They must also reside in Canada on December 31st; or, if deceased, had resided in Canada on the date of death.

What is “eligible pension income”?

Eligible pension income is:

• 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 Pension Plan payments do not qualify.

How do you indicate your wish to split eligible pension income?

Pension splitting affects the tax payable for both persons, so they must both agree to the allocation for the year in question by completing Form T1032, Joint Election to Split Pension Income (available January 2008). Your 2007 income tax return will include new lines for the pensioner to deduct the allocated pension amount and for spouses to report it.

Does pension splitting affect other tax credits?

The GST credit, Child Care Tax Benefit and related provincial benefits will not change as they’re based upon the net incomes of both spouses. However, pension splitting will affect any tax credits and benefits calculated using one individual's net income, such as the age amount, the spouse or common-law partner amount, and the repayment of Old Age Security benefits.

For more detailed information, please consult the Canada Revenue Agency website at: www.cra.gc.ca or call my office at 1-800-661-1183.