Wednesday, March 21, 2007

Pension Splitting: How it changes your retirement plan

I'm not sure I would consider pension splitting the holy grail of retirement, but it is going to be a very useful tool to have. Yet what exactly is 'pension income' according to the government? Basically any income that you can enter on line 115 of your tax return, but you will have to be careful what you claim on this line for example OAS and CPP don't qualify (but you can already split your CPP pensions). See this section at for more information.

The great thing about pension splitting is if you read all the fine print on line 314 you might be able claim the pension deduction for both of you then. So with the basic deduction, increased pension deduction and increased age deduction (age 65+) you could deduct up to $15,995 each or $31,990 total for a couple. No wonder people want to retire with tax breaks like this I can save over $2000/year in federal tax for my wife and I.

Does this mean the spousal RRSP is now useless? No, they are still very useful for your early retirement years. Since you can still split your savings between you for a lower tax rate when you withdrawal them. If you try to convert your RRSP to a RRIF and expect it to be pension income you might be in a bit of shock. From what I've been reading that doesn't qualify as pension income if your under age 65.

Therefore my savings plan for my early retirement years is unaffected by pension income splitting, but it will save me some tax after I turn 65.


Canadian Money said...


"No wonder people want to retire with tax breaks like this"

I am still in shock by how much my income tax reduced after I retired. The reduction was in-the-order of 75 percent less!

Canadian Dream said...


Good to know that my tax bill will be coming down when I retire, but 75%, that is more than I thought.