OK, You Can Split Pension Income Now, But How Much Should You Split?

For the first time in history seniors who receive eligible pension income can elect to have their spouse or common-law partner report up to half of that income. Should all taxpayers transfer as much as they can? Is pension splitting good for everyone?

The answer to the last question is easy ñ no, not everyone will benefit from splitting pension income. For example, where both spouses have eligible pension income and both are in the highest tax bracket. Likewise when income is low enough that neither spouse is taxable, transferring pension will be of no benefit.

The answer to the first question is not so simple. Reducing income for a high-income senior can have several benefits. Along with the obvious reduction in taxes payable at the taxpayerís marginal tax rate, reducing income may also reduce the clawback of Old Age Security and may increase the taxpayerís age amount. However transferring income to a spouse may have the exact opposite effect. So, no simple rule will work for all taxpayers. However, here are some guidelines that will help you to optimize the transfers for most taxpayers.

Higher Income Spouse with Pension
Where the spouse who has the pension income is the higher-income spouse, transfer just enough to equalize their taxable incomes. If there is not enough income eligible for transfer, transfer all that is available. This is true even if the other spouse has eligible pension income By equalizing taxable income, the couple will generally pay the minimum amount of tax.

In fact there is a lot of leeway in the amount selected for transfer with little or no tax effect, so long as both taxpayers are in the same tax bracket (both federally and provincially) and the transfer takes the higher income spouse out of a clawback zone.

One Spouse Under 65
In cases where the spouse is under 65, it may be beneficial to increase the lower spouseís income even more where the transfer will decrease the older spouseís clawbacks.

Lower Income Spouse with Pension Income
Where the pension income amount claimed by the couple is less than $4,000 it will generally be beneficial to transfer pension income to maximize the pension income amount claimed by the couple, even if you are transferring the income to a spouse who has a higher taxable income.

If your income tax software does not optimize pension income splitting, be sure to look carefully at each return where pension income and spouses are involved. Apply these general rules and answer these questions:

1. Can transfer of pension income equalize the spouseís income tax brackets?
2. Can transfer of pension income reduce the clawback of the age amount or OAS on one return without increasing them on the other?
3. Can transfer of pension income increase the total pension income amount available to the couple?