When Should You Consider Pension Splitting?
Significant Income Difference Between Spouses
If one spouse is in a higher tax bracket and the other is in a lower or zero tax bracket, splitting pension income can reduce overall taxes by shifting income to the lower-earning spouse.
Optimize Income-Tested Benefits
Splitting income may help reduce the higher-earning spouse’s net income, preserving or maximizing eligibility for income-tested benefits like:
Old Age Security (OAS) (to avoid the OAS clawback)
Guaranteed Income Supplement (GIS)
Medical Expense Tax Credit
Avoid Higher Tax Brackets
If the pension income pushes one spouse into a higher tax bracket, transferring a portion to the lower-earning spouse keeps both within lower brackets.
Maximize Age and Pension Credits
Splitting pension income allows both spouses to claim the age amount credit or pension income credit if eligible.
How to Assess if Pension Splitting is Right for You
Compare Marginal Tax Rates
Look at the tax brackets for both spouses. The larger the gap between their marginal tax rates, the greater the benefit from pension splitting.
Calculate Tax Savings
Use tax software like CloudTax to simulate different scenarios with and without pension splitting. This will show the potential tax savings.
Review Your Benefits
Ensure that reducing one spouse’s net income won’t unintentionally affect income-tested benefits for the other spouse.
When Might Pension Splitting Not Be Beneficial?
If both spouses are in the same tax bracket, there may be no tax advantage.
If splitting income increases the lower-earning spouse’s income to the point where they lose income-tested benefits or face new taxes, it could negate the savings.
Why This Matters
Knowing when to use pension splitting ensures you optimize your tax situation while protecting your eligibility for benefits.