Who Should Use Pension Splitting to Minimize Taxes in Canada


Pension splitting allows married couples in Canada to minimize their taxes. It involves the transfer of income from one spouse to another so that both spouses are taxed at lower rates.

This article will explore who should use pension splitting to minimize taxes in Canada and how it works.

Who Is Eligible to Use Pension Splitting?

To meet the eligibility requirements for this program:

  • Both you and your spouse must be Canadian residents,
  • Living together during the tax year,
  • Remain together for at least 90 days in the following tax year.

How Does Pension Splitting Minimize Taxes?

There are four main ways pension splitting can reduce taxes:

  • First, it allows family members to move money from one member’s higher tax bracket into another’s lower one;
  • Second, it reduces the number of taxable dividends collected by both parties;
  • Third, it eliminates any additional surtaxes on high-income earners;
  • Fourth, it helps increase the overall contribution room for Registered Retirement Savings Plans (RRSPs).

By transferring retirement income between partners who have different marginal tax rates, couples can effectively shift some of their income from a higher-bracketed partner to a lower-bracketed partner and consequently save more in total taxation costs.

In addition to minimizing federal and provincial/territorial taxes paid by partners in a marriage or common law relationships, pension splitting also offers other benefits, such as providing greater financial security during retirement.

It allows the funds to be kept invested longer so they can generate significant returns prior to eventual withdrawal. Splitting pensions can help couples create advantageous tax circumstances while still being able to take full advantage of all available deductions and credits applicable under Canadian law.

How Do You Apply for Pension Splitting?

The process of applying for pension splitting involves completing some paperwork with one’s employer, former employer, financial institution, or other trusted source. Generally speaking, individuals will need to submit information such as their name, date of birth, Social Insurance Number (SIN), and proof of identity.

They may also have to provide details about their spouse/partner’s SIN number as well as a copy of their marriage certificate or common law relationship agreement.

It is important that all documents are filled out correctly and accurately; mistakes on these forms can lead to delays and potential denials from either one’s employer or financial institution.

Is Pension Splitting a Good Choice for Everyone?

The benefits of pension splitting depend on individual circumstances:

  • If both partners have similar incomes, they will usually benefit from pension splitting because it allows them to shift some of the higher-earning partner’s income into the lower-earning partner’s hands at a lower marginal rate.
  • However, if one partner has significantly higher earnings than the other or only one partner has an active source of retirement income, then there may not be any tax savings associated with pension splitting.
  • Additionally, if either person has high financial assets or liabilities that are subject to taxation such as capital gains or rental losses then this should also be taken into consideration when deciding whether or not to use pension splitting.

Final Thoughts

Pension splitting provides couples with the potential for significant tax savings; however, it is essential that those interested become familiar with all aspects prior to taking action so as to avoid any financial missteps.

Ultimately, if used correctly and within the boundaries set out by Canada Revenue Agency, pension splitting could prove invaluable in reducing taxable income for Canadians across the country.

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