Income Splitting

The basic rule is that any payment that qualifies for the $2000.00 federal pension income credit is eligible for income splitting. For those individuals who are age 65 by December 31, 2013, the following are eligible for income splitting.

1) Income from a Deferred Profit Sharing Plan (DPSP)

2) Taxable portion of prescribed/non registered annuities

3) Lifetime retirement benefits from an employer pension plan- retirement pension plan (RPP)

4) Variable retirement benefits from an employer pension plan (RPP or PRPP)

5) Income from a Registered Retirement Income Fund (RIFF) or Locked In Retirement Income Fund (LRIF)

6) Retirement Benefits from the Saskatchewan Plan (SPP)

Under age 65, individuals can still split lifetime retirement benefits from a RPP or SPP. Income from a DPSP, annuity, variable retirement benefits or a RRIF/LRIF is only eligible when received as a result of the death of a spouse or partner.

CPP and QPP retirement benefits are not eligible for income splitting. If you plan to receive income from CPP or QPP you must apply to Service Canada. The government will review the contribution history of you and your spouse/partner to determine how the benefits can be split.

Other income sources that are not eligible for income splitting include

1) OAS benefits

2) Income from a U.S. Individual

3) IRA from the United States

4) Retiring allowance Payments

5) Death Benefits

Foreign source pension income splitting depends on whether some or all of the payment is taxable here in Canada. The tax free portion, if any, is not eligible for income splitting.

For retirement compensation arrangements (RCA) the base DB benefit payments are eligible for income splitting and the RCA payments are not eligible.

The Income TAX Act allows for a split of up to 50% of the total pension income received, however it is up to the individual taxpayer to decide on the appropriate percentage. A CRA for T 1032 Joint Election to Split Pension Income must be included with the tax returns.

Issues to also consider are the marginal tax rates of the two spouses or partners, the claw back zones for OAS and the age credit. The percentage used in pension splitting can vary from year to year. Pension income splitting allows both individuals to be eligible to claim the $2000.00 pension credit.

The advice of an accountant can help to determine your most beneficial percent for income splitting.