Pension Splitting

What is pension splitting?

Beginning with 2007 income tax returns, Canadian residents will generally be able to allocate up to one-half of their eligible pension income to their spouse (or common-law partner) for income tax purposes.
How does this benefit me?

The first $2,000 of pension income reported on an individual's tax return is eligible for the pension income amount.  By allocating at least $2,000 of pension income to a spouse who does not already report pension income, you maximize the credits available to your family.

This allows you to more evenly distribute income between you and your spouse.  If the spouse who does not receive the pension is the lower-income earner, it allows you to allocate up to half of the pension income of the higher-income earner so that a portion of the pension is taxed at a lower tax rate.

This also presents a unique tax-planning opportunity when determining your optional inventory amount.  Careful consideration should be given to maximizing the use of lower tax brackets by both you and your spouse in conjunction with your farm and pension income.

Who qualifies?

A pension recipient and his or her spouse can elect to split the eligible pension income received in the year if:

• They are married or in a common-law partnership with each other in the year and are not, because of breakdown in their marriage or common-law partnership, living separate and apart from each other at the end of the year and for a period of 90 days commencing in the year; and
• They are both resident in Canada on December 31, or
  • If deceased in the year, resident in Canada on the date of death, or
  • If bankrupt in the year, resident in Canada on December 31 of the calendar year in which the pre- or post-bankruptcy year ends.

There are no age requirements (i.e. a spouse who is 40 can still qualify for the pension-splitting.)

What is eligible pension income?

Eligible pension income is generally the total of pension amounts received in the year that qualify for the pension income amount.  Old Age Security and Canada or Quebec Pension Plan payments do not qualify.

How do I split pension income?

The pensioner and spouse have to make a joint election, using the new Form T1032 when filing their 2007 personal tax returns.

What about other income-splitting opportunities?

Many other income-splitting opportunities exist for your farm income.  If you have a spouse or children, you can maximize the use of the basic personal exemption and lower tax brackets across the family by paying these family members for services they provide relating to your farm operation.  These services may include working with livestock, crop production, or even bookkeeping assistance.

For further information on pension splitting and other income splitting opportunities, contact your local Collins Barrow office.