Should you always split your pension income?
A. Income splitting is a strategy to move income from a high-income taxpayer to a lower income family member, with an aim to lower the household’s overall tax bill. There are many ways to do this, but perhaps none is easier than pension income splitting in retirement.
Pension income splitting allows eligible pension income to be reallocated from one spouse to another. Practically speaking, it results in a tax deduction on line 21000 of a T1 tax return—a split-pension deduction—or the higher-income spouse. The recipient spouse claims an income inclusion on line 11600 for the split-pension amount. The result is that the income is effectively moved from one spouse to the other.
Married or common-law taxpayers jointly elect to split their pension income when they file their tax returns, so this is a retroactive tax strategy. This allows pension income splitting to be fine-tuned after the initial preparation of both spouses’ tax returns.
Eligible pension income has limits both before and after age 65. Before a pension income recipient reaches age 65, the most common sources of eligible pension income to split with their spouse include defined benefit (DB) pension income and taxable foreign pension income, like U.S. Social Security. (For the full list, see here.)
After age 65, more income sources become eligible, including Registered Retirement Income Fund (RRIF) withdrawals, defined contribution (DC) pension withdrawals and annuity income. Note that Registered Retirement Savings Plan (RRSP) withdrawals are not eligible, so to split RRSP income with a spouse, you need to convert your RRSP to a RRIF. (The full list after age 65 is here.)
Common pensions, like Canada Pension Plan (CPP) and Old Age Security (OAS) are not eligible for pension income-splitting. A CPP retirement pension is eligible for pension sharing (you need to send an application to Service Canada, and you can only split the portion earned during your relationship). You can apply before or after you start to receive benefits to have your pension and your spouse’s pension split equally. This may result in more CPP benefits being payable to the spouse who did not contribute as much to CPP. (See here for more information.)
Unfortunately, for those with U.S. retirement savings, Individual Retirement Accounts (IRAs) are not eligible for pension income splitting regardless of the age of the account holder.