The benefit of pension income splitting for Canadian seniors has often been described as simply moving pension income from a higher tax bracket to a lower tax bracket. However, this is an oversimplification, as there are many more benefits to pension income splitting then access to a lower tax bracket.
One additional benefit is increased access to personal tax credits. Pension income splitting may be used to increase the amount of certain credits, such as the age credit, pension income credit, and the medical expense credit. For example, if a husband has pension income and his wife doesn’t, regardless of their tax brackets, the couple can benefit from pension income splitting by transferring $2,000 to the wife so that she can claim the pension income credit. Pension income splitting may also be used to increase the usefulness of other credits, such as the charitable donation credit, and the dividend tax credit. For example, where spouse A’s only income is $18,000 in dividends, spouse A will not fully utilize their dividend tax credits. However, the dividend tax credits may be used to shelter income transferred from spouse B.
A second benefit is increased access to means-tested programs. Old Age Security (OAS) is a means-tested program, which means that when an individual reaches a certain level of income, the individual must repay all or part of the OAS they receive. Pension income splitting can be used to reduce an individual’s income to reduce or eliminate the impact of the means-test.
It should be noted that there are many reasonable scenarios in which transferring pension income from the spouse in the lower tax bracket to the spouse in the higher tax bracket minimizes the couples overall tax liability. For more detailed information, please click here.