Pension Income Splitting: Can It Make a Difference?

Tax season is here! If you have eligible pension income, there may be an opportunity to split income with a spouse/common-law partner. But just how much of an impact can this make? 

For tax purposes, up to 50 percent of eligible pension income can be split with a spouse.

Eligible pension income is determined by the recipient’s age and the nature of the income. In general, under age 65, it includes amounts received from a registered pension plan.* Over age 65, it also includes amounts received from Registered Retirement Income Fund  (RRIF), Locked-In Retirement Income Funds (LRIF) or other annuity payments. While the obvious benefit of pension income splitting is the tax benefit achieved by allocating income from a spouse in a high-income tax bracket to one in a lower tax bracket, there are other potential advantages: 

Age Amount Tax Credit — The 2018 federal age amount is $7,333, available to those 65 years or older. It is reduced for income over $36,976 and eliminated at $85,863. A benefit may be achieved if a spouse can reduce income to access the credit. 

Pension Income Amount — Allocating pension income to a spouse who wouldn’t otherwise have eligible pension income could entitle the spouse to claim up to a $2,000 tax credit. 

Old Age Security — Splitting eligible pension income may enhance the family unit’s ability to receive OAS payments. 

The chart below shows two scenarios for two spouses over age 65, where Spouse A earns $86,000 of eligible pension income, and Spouse B earns none. When they income-split, they use lower tax brackets, enhance tax credits and avoid an OAS clawback for Spouse A:

 

As always, consult with a tax advisor to consider whether splitting income with a spouse/common-law partner is beneficial to your situation.