In other words, you decide each year whether you want to do the split, and you have the flexibility to change the elected amount each year.
The eligible pension income that is eligible for the split includes:
If you are 65 or over in the year
- Pension annuity income (for example, from a defined benefit pension plan);
- Registered retirement savings plan (RRSP) annuity payments;
- Payments out of a registered retirement income fund (RRIF);
- Periodic payments from a money purchase (defined contribution) pension plan;
- Pension payments from a pooled registered pension plan;
- Annuity payments from a deferred profit sharing plan; and
- Retirement payments out of a retirement compensation arrangement.
If you are under 65 throughout the year, eligible pension income is normally limited to “qualified pension income”, which includes the first item above − pension plan annuity income. However, the other amounts also qualify as qualified pension income if you are receiving them as a consequence of the death of a former spouse or common-law partner.
Benefits of the split
Making the pension income split is obviously beneficial for you if your spouse is in a lower tax bracket. That is, by shifting the split amount into your spouse’s hands at a lower tax rate, you will save overall tax as a couple.
Another benefit of pension income splitting, even if your spouse is not in a lower bracket, is the doubling of the pension tax credit. The federal credit is 15% of up to $2,000 of your eligible pension income (the provincial credit rates vary). As discussed in the section below, your spouse can also qualify for the credit if you make pension income split,
which again will result in overall tax savings because you can both claim the credit.
Shifting your pension income can also help if you are subject to the Old Age Security (OAS) “clawback tax”. Under that clawback tax, the OAS benefits you receive are clawed back at a rate of 15% of your income over $79,054 (2020 figure, indexed for inflation). If your income is higher than that amount, the pension income split may benefit you since it can reduce the OAS clawback. However, if the split puts your spouse over the threshold OAS amount, you will have to take that into account in determining whether there is an overall tax savings. Fortunately, most tax return software programs do the calculation for you.
Similarly, the age credit, which is available to anyone who is 65 years of age or older, is phased out if your income is over $38,508 and is eliminated entirely when your income reaches $89,421 (2020 figures). The age credit is therefore another factor to take into account, but again, most tax return software will do the math for you.
Doubling up the pension credit
The eligible pension rules apply in terms of your eligibility for the pension credit. If you are 65 years or older, the eligible pension amounts described earlier all qualify for the credit. If you are under 65, only qualified pension income amounts qualify for the credit. The federal credit is 15% of up to $2,000 of the pension income. Provincial credits vary from province to province.
The rules also apply to your spouse if you make the pension income split. The split pension amount is treated as the type of
pension income that it would have been in your hands, and then the credit for your spouse may apply depending on their age.