Pension splitting is something that’s relatively new in Canada. Pension splitting allows you to take pension income and split up to 50% of that income with your spouse or with your partner.
When does that make sense?
The most obvious reason why it makes sense is if the other spouse or partner is in a lower tax bracket than you. By filing this annual election, which is a form that’s done with your tax return, you can have up to 50% of your pension income taxed in the hands of that lower income spouse or partner.
There are a couple of other reasons why you may consider pension splitting. Another reason might be because of the loss of government benefits, like old age security. OAS is based on your income. If your income is high, you may lose some of the OAS. By transferring come of that pension income to a spouse, you may be able to protect some of the OAS.
And finally, the pension income credit, the first $2,000 of pension income is something that you may be able to double up on if the spouse or partner otherwise didn’t have pension income.
Speak to your financial advisor about whether pension splitting is the right thing for you.