Which types of pension income can be split with your spouse in retirement?

Here, we’re focusing on splitting pension income, which can include income sources that are not from traditional pensions.

Can you split your income?

Here’s a quick table for when you can and when you can’t split your income. Tap the pension income type to keep reading for the why and how.

Income splitting for DB pensions

When people think of pensions, they typically think of defined benefit (DB) pension income. DB pensions are calculated based on a formula that generally considers annual income and the number of years as an employee with the employer offering the pension, along with other factors, too. Most DB pensions will not make payments until age 55, but it may be possible to collect a pension earlier.

DB pension income qualifies to split with your spouse or common-law partner. You can move up to 50% of the income to your spouse on your tax returns. You claim a deduction and they claim an income inclusion. You would only split pension income if it resulted in a net advantage, whether a reduction in combined tax payable or an increase in government benefits.

Can you split income for SERPs?

Supplemental executive retirement plans (SERPs) are non-registered plans for executives or other employees. And it bears mentioning that a supplemental DB pension, or top-hat executive pension, with payments that exceed the registered pension plan (RPP) maximums will not qualify for splitting.

These pensions include a registered portion and an unregistered portion. The registered portion can be split, but the unregistered portion can only be reported on the recipient spouse’s tax return. The split between registered and unregistered will be reported on the pensioner’s government-issued tax slip so should be clear.

What about RRSPs?

Most people’s retirement savings are in their registered retirement savings plan (RRSP) account, including defined contribution (DC) pensions. RRSP withdrawals do not qualify for pension income splitting. However, if you convert your RRSP to a registered retirement income fund (RRIF), subsequent withdrawals will qualify starting when the account holder reaches age 65.

You do not have to convert your RRSP to a RRIF until December 31 of the year you turn 71, with withdrawals beginning at age 72. But the ability to split RRIF withdrawals at 65 may cause someone to consider converting their account by age 64.

Be sure the subsequent minimum withdrawals required each year from a RRIF fit into your overall decumulation plan. If you’re still working or you might have extraordinary income from the sale of a rental property, a cottage or investments in a non-registered account, you may not want to convert your RRSP just yet. Or at least you might convert only part of your account. You do not have to convert your entire RRSP to a RRIF all at once.

Do foreign pensions and retirement accounts qualify for income splitting?

Foreign pension income may qualify for pension income splitting if it is taxable in Canada. Most foreign pensions are taxable in Canada.

One important distinction is that income from a U.S. pension or 401(k) is eligible for pension income splitting, but income from a U.S. individual retirement account (IRA) is not. An IRA is like an RRSP.

A 401(k) can be transferred to an IRA. Before transferring a 401(k) account to an IRA, you should consider whether there are potential tax savings from being able to split the eligible 401(k) pension income instead.

The Canada Pension Plan and Old Age Security

Despite being pensions, the Canada Pension Plan (CPP) and Old Age Security (OAS) are not eligible for pension income splitting. However, there may be a way to proactively split your CPP with your spouse or common-law partner.

When you apply for CPP, you can complete an Application for CPP Pension Sharing of Retirement Pension(s). Service Canada will compare your pensions earned during your relationship and split the pensions accordingly for future payments. This may result in some of the retirement pension income earned by the higher-income spouse or the spouse who contributed for more years being moved to the other spouse. Before doing this, you should try to estimate future retirement income to make sure it is advantageous. 

Options for business owners

The Tax on Split Income (TOSI) rules that were introduced in 2019 made it more difficult for people with corporations to pay dividends to their spouse. A spouse who has not worked in the business may be prevented from receiving dividends and having them taxed at their lower tax rate unless the owner-manager is 65.

At age 65, the business owner can have dividends paid to a spouse which are exempt from TOSI and can be taxable to them. This effectively allows business owners with corporate savings or corporate income to split some of their notional pension—their business value—with a spouse.

How to split income for retirement

If you want to plan ahead, the higher-income spouse can contribute to a spousal RRSP in a lower-income spouse’s name. The contributor spouse gets the tax deduction, and the contribution uses their RRSP room, while the account-holder spouse can withdraw the funds in the future.

Watch out for the spousal attribution rules if you contribute and withdraw within three years. And, do not rule out this strategy simply because you think you can split your pension income in retirement. What if the rules change in the future? Spousal RRSPs may be a good way to mitigate this risk. Income splitting can reduce tax payable between spouses. It is important to plan ahead for pension income splitting before you retire and to consider annually when you file your tax return how to best maximize the income that can be transferred.

Read more about income splitting:

• 4 strategies for income splitting with a lower-income spouse
• Should you always split your pension income?
• An easy guide to income splitting for seniors
• How to invest with spousal loans for Canadians—and how to pay it back

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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