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.