How pension splitting works

By Lea Koiv | June 1, 2017 | Last updated on September 21, 2023
7 min read

Ten years have elapsed since the pension splitting legislation was enacted on June 22, 2007.

As we celebrate that milestone, we can also see that clients are largely missing out on the opportunity to pension split and save tax.

Read: Think you know pension splitting? Take this quiz

The latest Income Statistics from CRA (released in 2016 for the 2014 tax year) show that of the 27.5 million total tax filers (18.4 million of whom paid tax), only 1.2 million took advantage of the pension splitting rules. Yet despite that relatively small number, the total income transferred between returns in 2014 was $13.3 billion.

A big reason to educate yourself on pension splitting is the fact that your clients are aging.

The 2016 Census found that 16.9% of Canada’s population – one in six – are aged 65 or older. This is the group with the greatest opportunity to take advantage of these rules. Knowing the rules will allow you to present planning opportunities to existing and prospective clients.

Read: What sixtysomethings expect from their advisors

The appropriate planning is not always done at age 65. An example of this would be where lump sums are withdrawn from a RRSP, instead of from a RRIF.

It’s also possible to become ineligible for pension splitting before age 65. An example of this would be where a member of a Registered Pension Plan (RPP) commutes their pension. The pension income (i.e., lifetime benefit and any bridging benefit) received from the RPP would have qualified for pension splitting prior to age 65 (except for Quebec provincial tax purposes), and commuting would mean the plan member now has to wait until age 65 to potentially qualify.

Given these potential challenges, the pension splitting rules are something an advisor will want to discuss with plan members contemplating commuting their pension.

Pension splitting basics

Since 2007, a taxpayer who has reported certain income on their tax return has been able to elect to take a deduction for up to 50% of this amount and have his or her spouse (or common-law partner; we’ll refer to both as spouses) report a like amount. The spouses are able to jointly elect, provided they both reside in Canada at the end of the taxation year (or if one or both died in the year, on the date of death). A 90-day period of separation may also cause the couple to lose access to this provision. Thus, where there is either a change of marital status or a death in the year, the otherwise qualifying amount will have to be prorated.

Unlike CPP sharing (where possible), the income is not split at source. Instead, each taxpayer files CRA Form T1032 – Joint Election to Split Pension Income with his or her tax return. A unique election can be made each year.

Knowing all this, let’s dive into the details.

Advantages of pension splitting

There are four main advantages:

  • Tax rate differentials: If the spouse being allocated the income is in a lower tax bracket, overall income tax savings arise. (In Ontario, the difference between the top and bottom tax brackets is 33.48% — 53.53% less 20.05%.)
  • Creating access to the non-refundable pension credit: Except for certain retirement compensation arrangement (RCA) income, only income qualifying for the $2,000 pension credit can be split. Thus, generating income that qualifies for this credit will save tax. In certain instances, amounts allocated to a spouse will also allow the spouse to claim this credit. (For provincial tax purposes, the amount of the credit varies by province.)
  • Eliminating or mitigating the erosion of the age credit: This credit is clawed back once the taxpayer’s net income exceeds a threshold amount ($36,430 for 2017). Allocating income to a spouse may reduce the clawback of this credit. (Again, for provincial tax purposes, the credit amount varies by province.)
  • Eliminating or mitigating OAS clawback: OAS is clawed back once a taxpayer’s income exceeds a threshold ($74,788 for 2017).

Read: How to minimize OAS clawback

Note that the allocation of pension income may also affect certain federal, provincial or territorial programs.

Generally, whenever spouses attempt to split income, the income attribution rules are a concern. Tax practitioners were collectively surprised when the Department of Finance introduced rules that encouraged income splitting. Thanks to the pension splitting legislation, income attribution is not a concern if you follow the rules.

What income qualifies for pension splitting?

Most readers will be familiar with the common sources qualifying for splitting. However, there can be a significant knowledge gap regarding the opportunities available with annuity products. Moreover, most advisors are not aware of the breadth of potential sources here (the below list is not exhaustive).

Also note that different rules apply for those who have turned 65, and those who are younger.

Qualifying income for a recipient aged 65+

Those aged 65 or older on December 31 of a given tax year have the most to gain under these rules. Up to 50% of qualifying income can be allocated to a spouse of any age. While many advisors are familiar with the planning opportunities that exist with respect to amounts originating from registered plans, there is less recognition of the opportunities relating to non-registered sources. This is especially true with respect to annuities acquired with non-registered funds. This may be because not all advisors are licenced to sell insurance products.

Read: Essential tax numbers

Here are the types of eligible income:

  • Life annuities out of or under a superannuation or pension: The amounts may be paid from an RPP, or may be paid directly by the employer. Furthermore, the funds from an RPP may have been used to purchase a life annuity from an insurer, or the employee may have purchased a Section 147.4 annuity with the commuted value. Retroactive lump-sum payments qualify. There is no requirement that the amount be paid from a Canadian plan. However, CRA has taken the position that IRA payments do not qualify, nor do amounts that are tax-free in Canada because of a tax treaty. Thus, with U.S. Social Security benefits, any portion that is deductible in computing taxable income because of a tax treaty reduces the amount qualifying for splitting.
  • RCA payments: Since 2013, certain RCA payments have qualified. These must be in the form of life annuity payments and be top-up payments in respect of an underlying RPP. These amounts cannot be in excess of a specified limit ($102,005.40 for 2017), less other eligible pension income.
  • RRIF payments: Taxable RRIF payments to both the annuitant or to another beneficiary, including those from locked-in plans, qualify. (But any portion of the amount that has been rolled over to another RRSP, RRIF or annuity cannot be split.) Also, amounts received on deregistration of a RRIF qualify. Note that RRSP withdrawals are not on the list of qualified items. That’s because lump-sum RRSP withdrawals never qualify for splitting. As noted above, where the 65-year-old wishes to split income from this source, these funds must be transferred to a RRIF, and the withdrawal made from that plan.
  • Annuity payments from an RRSP. An RRSP must mature no later than at age 71. Annuity payments made in the year the plan matured or thereafter qualify. (Prior to the advent of RRIFs, an annuity was the only approved method of paying retirement income from an RRSP.) These annuities may be either life annuities or term-certain annuities to age 90.
  • Variable pension benefits. The pension-standards legislation of a jurisdiction may permit a defined contribution RPP to make RRIF-like payments. These would qualify.
  • Instalment payments under a deferred profit-sharing plan (DPSP). A DPSP must mature no later than the year in which the member turns 71. Where the member chooses the instalment payment approach (with the instalments made over a maximum of 10 years), these payments qualify.
  • Annuity payments under a DPSP or under a revoked plan. A member of a DPSP may choose to acquire an annuity with all or a portion of the funds in their DPSP. This annuity must be purchased from a licenced annuities provider, with the first payment beginning no later than the end of the year in which the member turns 71. Should a DPSP have its registration revoked, all amounts qualify.
  • Qualifying annuity from a pooled registered pension plan (PRPP). Funds transferred from a PRPP to acquire a qualifying annuity qualify.
  • Prescribed annuities. Non-registered funds may be used to acquire life or term certain annuities. If certain conditions are met, these annuities enjoy beneficial tax treatment. Instead of being taxed on an accrual basis (where the taxable portion is highest in the early years and then declines), they enjoy level taxation. That means the insurance company determines what portion of each payment is taxable; this portion then applies to all payment.
  • Non-prescribed annuities. Term-certain or life annuities acquired with non-registered funds may not necessarily qualify as prescribed annuities. By default, they’re considered non-prescribed annuities, and as such, are taxed on an accrual basis. An example of this might be where a taxpayer chooses to acquire an indexed life annuity. More interestingly, the insurer may offer term funds, which are similar to bank- or trust company-issued GICs. (Note that the accrual rules provide for a difference as to when the income is reported on a tax slip due to how the accrual rules work for annuities.) Few advisors recognize that clients can obtain qualified pension splitting income by simply transferring funds from a deposit-taking institution (e.g., bank, trust company, credit union or caisse) to an insurance product.

Income that does not qualify for splitting

Certain sources of income cannot be split under these rules. These sources include:

  • a pension or a supplement under the Old Age Security Act;
  • a benefit under the CPP;
  • a death benefit (the up to $10,000 that an employer may pay upon the death of an employee);
  • an amount that otherwise qualifies but, in respect of which the taxpayer has taken a deduction under another provision of the Income Tax Act (for example, interest incurred to acquire a non-prescribed annuity); and
  • payments from a RCA, except for those described in (b) above.

Next time, we’ll cover income that qualifies for splitting for taxpayers younger than 65 and look deeper at the rules. We’ll also cover planning opportunities.

Lea Koiv , CPA, CMA, CA, CFP, TEP, is a tax, pension and retirement expert who has held senior roles at a national insurer and international accounting firms. Reach her at

Leah Koiv headshot

Lea Koiv

Lea Koiv , CPA, CMA, CA, CFP, TEP, is a tax, pension and retirement expert who has held senior roles at a national insurer and international accounting firms. Reach her at