For most Canadian retirees, careful financial management is a necessity. Most live on an annual income which is less than that which they enjoyed during their working years, and opportunities to increase that income in any significant way are limited. As well, in recent years, inflation (especially with respect to food and shelter costs) has meant that more and more of that income must be allocated to necessities.
One of those necessities is, of course, paying one’s income tax. For many retirees, especially those who no longer have to pay a mortgage or rent costs, the annual income tax bill can be the largest single expense they face.
Canada’s tax system recognizes these realities by providing Canadians over the age of 65 with a number of targeted tax credits and deductions. Most such credits and deductions are easily claimed when completing the annual tax return; however, the benefits of one such deduction – pension income splitting – aren’t readily apparent from either the tax return form or the tax guide, and it’s likely that many Canadian retirees who could benefit from that strategy are simply not aware of it.
That’s a particularly unfortunate reality because pension income splitting has the potential to generate more tax savings among taxpayers over the age of 65 (and certainly those over the age of 71, for whom RRSP contributions are no longer possible) than just about any other tax planning strategy available to retirees. In addition, it’s one of the very few tax planning strategies which requires no expenditure of funds on the part of the taxpayer and which can be implemented after the end of the tax year, at the time the return for that tax year is filed.
When described in that way, pension income splitting can sound like one of those “too good to be true” tax scams, but that’s not the case. Essentially, what pension income splitting offers is a government-sanctioned opportunity for Canadian residents who are married (and, usually, where the spouse who receives the income is aged 65 or older) to make a notional reallocation of private pension income between them on their annual tax returns, and to benefit from a lower overall family tax bill as a result.
Pension income splitting, like all forms of income splitting, works because Canada has what is called a “progressive” tax system, in which the applicable tax rate goes up as income rises. For 2024, the federal tax rate applied to the first $55,867 of taxable income is 15%, while the federal rate applied to approximately the next $55,866 of such income is 20.5%. So, an individual who has $100,000 in taxable income would pay federal tax of about $17,427: if that $100,000 was divided equally between that individual and their spouse, each would have $50,000 in taxable income and the total federal tax bill for the family would be $15,000 – a federal tax savings of $2,427. Pension income splitting in this way would also produce a lower overall bill for provincial income tax payable for the year; the actual amount of such savings depends on the applicable provincial tax rates and brackets, and those in turn are determined by the taxpayer’s province of residence.
The general rule with respect to pension income splitting is that a taxpayer who receives private pension income during the year (the transferring spouse) is entitled to allocate up to half that income (without any dollar limit) to their spouse for tax purposes. In this context, private pension income means a pension received from a former employer and, where the income recipient is age 65 or older, payments from an annuity, a registered retirement savings plan (RRSP), or a registered retirement income fund (RRIF). Government source pensions, like the Canada Pension Plan (CPP) or Old Age Security (OAS) payments do not qualify for pension income splitting, regardless of the age of the transferring spouse.
The mechanics of pension income splitting are relatively simple. There is no need to transfer funds between spouses or to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify a pension administrator. Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032 E 2024, Joint Election to Split Pension Income, with their annual tax return. That form, which is not included in the annual tax return package, can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1032.html. Taxpayers can also arrange for a copy of the form to be mailed to them by calling the Agency’s automated ordering service at 1-855-330-3305.
On the T1032, the taxpayer receiving the private pension income and the spouse with whom that income is to be split must make a joint election to be filed with their respective tax returns for 2024. Since the splitting of pension income affects the income, and therefore the tax liability, of both spouses, the election must be made and the form filed by both spouses – an election filed by only one spouse or the other won’t suffice. In addition to filing the T1032, the spouse who is the actual recipient of the pension income to be split (the transferring spouse) must deduct from income the amount of pension income to be allocated to their spouse. That deduction is taken on Line 21000 of their 2024 return. And, conversely, the spouse to whom the pension income amount is being allocated is required to add that amount to their income on the 2024 return, this time on Line 11600. Essentially, to benefit from pension income splitting, all that’s needed is for each spouse to file a single form (the T1032) with the CRA and to make a single entry on their 2024 tax return.
By the end of February or early March, taxpayers will have received (or downloaded) the information slips which summarize the income received from various sources during 2024. At that time, couples who might benefit from this strategy can review those information slips and calculate the extent to which they can make a dent in their overall tax bill for the year by taking advantage of pension income splitting.
While there is relatively little information on pension income spitting included in the federal tax return or guide for 2024, the CRA does provide detailed information on that strategy on its website. Those wishing to obtain more information on pension income splitting can find that information at http://www.cra-arc.gc.ca/pensionsplitting/.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.
