Pension Income Splitting After 65

The income splitting page on this site names pension income splitting in a single line and moves on. It deserves a page of its own, because it is the one splitting rule in Canadian tax that costs nothing to use. There is no transfer of capital between spouses, no loan, no prescribed rate to track, no trust, and nothing to unwind later. Up to one half of one spouse's eligible pension income is simply reported on the other spouse's return. The pensioner deducts it, the receiving spouse includes it, and the household pays tax on the same total income at two sets of graduated rates instead of one. That is the whole mechanism, and it takes a paragraph to state. What takes a page is everything around it: what qualifies before 65 and what only qualifies after, what the shifted income does to the pension income amount, to the recovery tax on Old Age Security and to age related credits on both returns, and where the Quebec election parts company with the federal one.

What the election actually does

Section 60.03 of the Income Tax Act creates two roles. The pensioner is the person who received the eligible pension income and is resident in Canada. The pension transferee is the spouse or common-law partner, also resident in Canada, who was married to or in a common-law partnership with the pensioner at some time in the year and was not living separate and apart from them because of a breakdown in the relationship.

The elected figure is the split-pension amount. The pensioner deducts it in computing income under paragraph 60(c). The transferee adds it under paragraph 56(1)(a.2). Nothing leaves anybody's account. The pension continues to be paid to the same person, into the same account, on the same schedule.

The ceiling is set by the formula in the definition of split-pension amount: one half of the pensioner's eligible pension income, multiplied by the number of months in the year during which the two were married or in a common-law partnership, divided by the number of months in the year. A couple together for the whole year may elect anything from nothing up to one half. They are not obliged to elect the maximum, and the right figure is often not the maximum.

What counts as eligible pension income

Section 60.03 borrows its definition from subsection 118(7), the same definition that governs the pension income amount. It splits into two categories, and which one applies depends on age at the end of the year.

Pension income is the wider category. It takes in lifetime retirement benefits out of a registered pension plan, annuity payments out of a registered retirement savings plan, payments out of a registered retirement income fund, payments out of a deferred profit sharing plan, and several smaller sources.

Qualified pension income is the narrow category. It is built on lifetime retirement benefits out of a registered pension plan, together with amounts from the wider list received as a consequence of the death of a spouse or common-law partner. Several things people think of as pension are outside both categories at every age. Old Age Security is not eligible pension income. Neither is a Canada Pension Plan or Quebec Pension Plan retirement pension. Those two are the reason the separate sharing mechanism described further down this page exists at all.

The line that runs through age 65

Under subsection 118(7), a person who is 65 or older at the end of the year has eligible pension income equal to their pension income, the wider category. A person younger than that has eligible pension income equal to their qualified pension income, the narrow one.

The practical consequence is blunt. A person of 60 drawing a lifetime pension out of a former employer's registered plan can elect. A person of 60 drawing the same amount of money out of a registered retirement income fund cannot, because at that age fund payments are not qualified pension income unless they arrive as a consequence of a spouse's death.

This is why the page is titled after 65. It is at 65 that the ordinary retirement income of a household that saved in registered plans rather than in a defined benefit pension becomes eligible at all. It is also why converting a registered retirement savings plan to a fund is sometimes done at 65 rather than left to the year it is compulsory. Whether that is right depends on the whole return and belongs with a qualified tax professional.

How the joint election is made

The election is made on Form T1032, Joint Election to Split Pension Income. Both people complete it, both sign it, and the identical information goes with each of their returns. Section 60.03 requires the election to be filed with both returns by their respective filing due dates, and it permits only one joint election for a taxation year.

The conditions the Canada Revenue Agency applies at assessment are those in the Act: both resident in Canada on 31 December, or at the date of death; not living separate and apart because of a relationship breakdown for 90 days or more including 31 December; and eligible pension income in the pensioner's hands.

The election is not permanent. The allocated percentage is changed by filing a new signed T1032, and the election is revoked by a letter signed by both people. Either step must be taken on or before the day that is three calendar years after the filing due date for the year in question. That window matters, because a return is often reassessed later for an unrelated reason and the percentage that was optimal on the original figures no longer is.

The pension income amount on both returns

Subsection 118(3) gives a non-refundable credit calculated as the appropriate percentage applied to the lesser of a fixed amount set in the Act and the individual's qualifying pension income. That fixed amount is not indexed, and this page does not print it. The Canada Revenue Agency states the current figure on its page for the pension income amount.

The election can create a second one of these credits where the household had only one. A spouse with no pension income of their own has no pension income amount to claim. Give them a share of the pensioner's income and they may have one, which is a credit gained at no cost beyond the paperwork.

The Canada Revenue Agency is explicit that this does not follow automatically. Income that qualifies for the pension income amount in the pensioner's hands does not necessarily qualify in the receiving spouse's hands, because eligibility turns on the source of the income and on the receiving spouse's own circumstances. Form T1032 works the calculation through for each person separately, and each claims their own figure.

The recovery tax on Old Age Security

Part I.2 of the Income Tax Act imposes the recovery tax on Old Age Security. Section 180.2 applies a percentage fixed in the Act to the amount by which an individual's adjusted income for the year exceeds a threshold. The threshold printed in the Act is a base amount indexed under section 117.1, so the figure for any given year is published by the Canada Revenue Agency and by Service Canada. This article prints neither.

Adjusted income is the individual's income under Part I with only the adjustments section 180.2 itself lists. It is computed on each spouse separately. There is no household figure and no joint return in Canadian tax.

This is where pension splitting earns most of what it earns for a couple over 65. The election reduces the pensioner's income and increases the transferee's, so it reduces the pensioner's exposure to the recovery tax and increases the transferee's. Where one spouse sits above the threshold and the other sits well below it, moving income across the line can remove the recovery tax from one return without creating it on the other. Where both sit above it, the election does nothing for the recovery tax and is being made for the graduated rates alone. The existing page on the recovery tax sets out the rule in full.

What else moves when income moves

Every income tested amount on both returns moves with the election, in opposite directions. The age amount is reduced as net income rises, so an election that lowers one spouse's net income can restore part of their age amount while eroding the other's. The medical expense credit is computed against a percentage of the claimant's net income, so lowering the net income of the spouse who claims the family's medical expenses can enlarge the claim.

It runs the other way as well. The spouse or common-law partner amount is reduced by the other spouse's net income, so an election that raises a previously low income spouse above a line can extinguish a credit the household was already receiving. Provincial credits, provincial drug plan premiums where they are income tested, and the Guaranteed Income Supplement where either spouse is receiving it, all respond to the same figures.

None of this can be reasoned out one credit at a time. It is a whole of return calculation on two returns at once, which is what tax software is doing when it proposes an optimised percentage. The percentage that minimises combined tax is frequently not one half, and on some returns it is zero.

The Quebec election and where it differs

A Quebec resident makes two elections, not one. The federal election is the T1032 described above. The Quebec election is separate, is made on the schedule Revenu Quebec provides for retirement income splitting, and is signed and filed with both spouses' Quebec returns.

The important difference is the age condition. Quebec requires the transferring spouse to have reached 65 before the end of the year, or at the moment they ceased to reside in Canada during the year. The federal rule imposes no such condition on the pensioner: a person under 65 with lifetime retirement benefits out of a registered pension plan may elect federally. A Quebec resident in that position splits on the federal return and does not split on the Quebec one, which is a result that surprises people every spring.

Two further points of Quebec mechanics are worth knowing. The Quebec tax withheld at source on the transferred income moves in the same proportion as the income, so the transferring spouse is not left having paid Quebec tax on income reported by someone else. And the two elections are independent, so the percentage elected for Quebec purposes need not equal the percentage elected federally. Revenu Quebec administers the Quebec election and states its conditions.

Why sharing a public pension is a different thing

A Canada Pension Plan or Quebec Pension Plan retirement pension is not eligible pension income and cannot be put on a T1032. The mechanism that reaches it is not a tax election at all. Section 65.1 of the Canada Pension Plan permits the assignment of part of a retirement pension to a spouse or common-law partner, and Retraite Quebec administers the equivalent division of a Quebec Pension Plan retirement pension.

The differences are structural. Sharing divides the benefit itself, so two payments arrive where one used to and each person is taxed on what they receive. Only the portion attributable to the months the couple lived together during the joint contributory period is shareable. Section 65.1 sets an age condition of 60 on the spouse who has not contributed, and where both have contributed the sharing runs both ways at once, which cancels much of the effect where the two pensions are similar.

It is also not annual. It is applied for once and it continues until it ends, and section 65.1 lists the events that end it: a death, separation for twelve months, a divorce or a judgment of nullity, a joint written request to cancel, or the non-contributor becoming a contributor. The page on when to start a public pension covers the timing decision that comes before this one.

The mistakes that show up every spring

The first is electing the maximum by reflex. One half is a ceiling, not a recommendation, and pushing a low income spouse up through a credit threshold or a provincial premium line can cost the household more than the graduated rates saved. The second is forgetting the instalment consequences. Moving income onto a return that has never had much on it changes what that person owes and can create an instalment obligation for the following year.

The third is treating the election as though it settles who owes the tax. Subsection 160(1.3) makes the pensioner and the pension transferee jointly and severally, or solidarily, liable for the additional tax the election creates on the transferee's return. The couple cannot elect their way out of a collection problem.

The fourth costs the most and is invisible. A couple who split for years and never revisit it when circumstances change, a pension starting, a fund minimum rising, a death, a sale, keeps electing a percentage that suited a different year. Rework it on the current year's figures, on both returns together, with a qualified tax professional.

Frequently Asked Questions

Continue Learning

The parent page on income splitting for couples and families puts this alongside the other methods and their attribution rules, and the spousal registered retirement savings plan is the tool that does much the same job years earlier. Read the recovery tax on Old Age Security for the rule this election is most often used against, minimum withdrawals from a registered retirement income fund for the income that arrives whether it is wanted or not, and when to start a public pension for the decision that sets the rest of the picture.