Earlier this year, I wrote an article about splitting eligible pension income for the year of death. In brief, up to 50% of eligible pension income received by the deceased can be split with a surviving spouse or common-law partner.

After reading the article, an advisor asked a question about the reverse: What if, for the year of death, the surviving spouse or partner has eligible pension income that they wish to split with the deceased? How much of this income could they split?

Consider the following scenario:

Trevor, 78, died in August. Prior to death, he didn’t receive any eligible pension income; however, his spouse, Nicole (70), did. For the year of Trevor’s death, Nicole received \$3,500 each month from a registered pension plan and \$1,000 monthly from a RRIF. In preparing her tax return for the year, Nicole wonders what portion of her eligible pension income could be split with Trevor for the year.

The following formula is used to calculate the amount eligible to be split with a spouse or partner under pension income-splitting rules for the year:

Amount eligible to be split = (number of months married or living common-law in the year ÷ number of months in the tax year 1) × eligible pension income × 50%

Note, the tax rules don’t consider you to be in a married or common-law relationship after death.

Trevor had no eligible pension income for the year, so the above formula wouldn’t apply to his income. Nicole had \$54,000 of eligible pension income: \$42,000 of periodic pension payments, which can be split at any age;2 and \$12,000 of RRIF income, which can be split beginning at 65.

Applying the above formula to Nicole’s case, the amount eligible to be split is \$18,000, calculated as (8 ÷ 12) × \$54,000 × 50%. Because Trevor died in August, the amount Nicole can split with him under pension income-splitting rules is pro-rated based on the month of Trevor’s death. Had Trevor not died, up to \$27,000 would have been eligible for splitting, assuming no breakdown in relationship in the year. This treatment is confirmed by CRA technical interpretation #2008-0275731E5.

CRA form T1032 Joint Election to Split Pension Income would be used to calculate the amount eligible for splitting. Provided it’s included in Trevor’s taxable income for the year, any amount up to this amount can be deducted on Nicole’s tax return for the year. This treatment would benefit the family if Trevor’s tax rate for the year of death is less than Nicole’s or if income-sensitive benefits, such as Old Age Security, would be preserved as a result of the split.

The splitting of eligible pension income can provide significant tax savings for families. While it depends on the circumstances (e.g., types of income, age of pensioner, tax rates, etc.), it’s good to know that this option is available, even for the year of death.

Wilmot George , CFP, TEP, CLU, CHS, is vice-president, Tax, Retirement and Estate Planning at CI Investments. Wilmot can be contacted at wgeorge@ci.com.

Notes:

1 Where the transferring spouse or partner is deceased, the number of months up to and including the month of death is used.

2 Age 65 is required for Quebec tax purposes.