We have had quite a few inquiries from our members about the pension splitting option, which has prompted us to search for more information on the topic. We have found some very useful FAQs on the CCH website Click here that should answer many of your questions. The FAQ’s are reprinted below with their permission.
This month’s newsletter reproduces a Q&A issued by the CRA on July 18, 2007 to address various questions raised by the pension income splitting initiative announced in the 2007 Federal Budget and implemented by Bill C-52. For example, we learn that pensioners intending to split their pension income when they file their annual tax return cannot have the tax deducted from their pension income reduced during the year. The full text of the release was reproduced in CCH’s Wealth Management Times newsletter No. 43, dated August 2007.
1. What is pension income splitting? Beginning with 2007 income tax returns, Canadian residents will generally be able to allocate up to one-half of their income that qualifies for the existing pension income tax credit to their resident spouse (or common-law partner) for income tax purposes.
The amount allocated is deducted in determining the net income of the person who actually received the pension income, and it is included in computing the net income of the spouse or common-law partner. Pension splitting affects the calculation of income and tax payable for both persons, so they must both agree to the allocation in their tax returns for the year in question.
2. Is it necessary to contact the payer of the pension? Splitting eligible pension income does not have any effect on how or to whom the pension income is paid, so it does not involve the payer of the pension. Information slips will be prepared and sent to the recipient of the pension income in the same manner as previous years.
3. Who qualifies for pension income splitting? A pension recipient (pensioner) and his or her spouse or common-law partner can elect to split the pensioner’s “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 a 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. A pensioner and his or her spouse or common-law partner will still be eligible to split pension income if living apart at the end of the year for medical, educational, or business reasons (rather than a breakdown in the marriage or common-law partnership). 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 tax year (pre- or post-bankruptcy) ends.
4. What is “eligible pension income”?
Eligible pension income is generally the total of the following amounts received by the pensioner in the year (these amounts also qualify for the pension income amount):