In Canada, retired couples or common-law partners can take advantage of pension income splitting allowed by the CRA to balance their incomes and reduce overall family taxes. Here’s a simple breakdown:
Who Is Eligible?
If both partners receive a pension and there is a significant income gap, the higher-income partner can allocate up to 50% of their eligible pension income to the lower-income partner when filing taxes.
Since Canada uses a progressive tax system, this approach allows more income to be taxed at a lower rate, reducing the family’s overall tax burden.
How Does It Work?
File taxes jointly as a family: Each partner reports their total income on their individual tax returns.
Complete Form T1032: This form is required to apply for pension income splitting and must be signed by both partners.
Why Choose Income Splitting?
Reduce overall tax liability: Shifting income from the higher-income partner to the lower-income partner helps avoid higher marginal tax rates.
Maximize tax credits: The lower-income partner may also qualify for additional tax credits (e.g., the pension income tax credit).
Example
Mr. A earns a pension income of $70,000, while his partner, Ms. B, has an income of only $20,000. Mr. A can allocate up to $35,000 (50% of his pension income) to Ms. B for tax purposes. After income splitting: Mr. A’s taxable income becomes $35,000. Ms. B’s taxable income increases to $55,000. While their combined income remains $90,000, both will be taxed in lower brackets, significantly reducing their total tax bill.
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