Pension Income Splitting Takes on a Split Personality
April 18th, 2010I am a great fan of pension income splitting, which allows spouses to split eligible pension income for tax purposes. The underlying logic is that, under Canada’s progressive tax system, a couple who both have income of $50,000 per year pay less tax in combination than a couple where one spouse or partner makes $80,000 per year and the other makes $20,000. So, if the higher income spouse or partner can transfer some pension income over to the other, they can try to finesse an optimal tax position. Our research has shown that this optimal position is not always obvious. While the underlying theory is to move taxable income from one tax bracket to another (lower) one, the position is made more complex by tax credit rules, the OAS clawback, and provincial surtaxes.
This week we met with a client who is a member of a defined benefit pension plan, and she told us she was splitting her pension income with her husband, who is still working. Initially this seemed to defy logic. Why share your pension with an individual who has a higher income than you do? Then the answer became clear. The husband is aged over 65 and has no pension income. By sharing a small amount of her pension with her husband, our client is creating a pension credit for him. This more than compensates for the fact that the income will be taxed at a higher rate.
Patrick Longhurst
