Eligible couples can jointly elect to allocate up to 50% of eligible pension income. CPP and OAS themselves are not eligible for this pension-income-splitting election. The optimal percentage can change each year because tax brackets, credits and OAS recovery apply individually.
What income can be eligible
CRA states that eligible pension income can include certain pension or annuity income and, generally for individuals age 65 or older, RRIF income and RRSP annuity income. The detailed eligibility depends on age and the type of payment.
CPP and OAS are not eligible for the pension-income-splitting election described on Form T1032.
Why 50% is not automatically optimal
The law allows up to 50% of eligible pension income to be allocated, but the tax-minimizing percentage can be smaller. Moving income to the other spouse can affect:
- federal and provincial marginal tax rates;
- the pension income amount;
- the age amount and spouse/common-law partner amount;
- OAS recovery tax for each person;
- provincial credits and surtaxes.
Simple example
If one spouse has $80,000 of eligible pension/RRIF income and the other has $20,000 of taxable income, splitting some eligible income may reduce the first spouse’s marginal tax rate. But transferring too much can push the receiving spouse into a higher bracket or create their own OAS recovery. The best percentage is therefore a household optimization problem.
How the household tax optimizer handles splitting
The planner evaluates eligible pension-income allocation annually, up to the legal maximum, and estimates household tax before and after the allocation. It also recalculates OAS recovery for each spouse and incorporates selected federal/provincial retirement credits.
Optimize pension splitting
Enter both spouses and let the planner compare annual eligible pension-income allocations.