The mathematics of pension splitting

National Post


The new pension-splitting rules allow Canadians to split up to half of their pension income by allocating it to a spouse or common-law partner. If your spouse or partner is in a lower tax bracket, pension splitting is a no-brainer. But there are other benefits, including the ability to double the pension credit, avoid a clawback of Old Age Security benefit payments and preserve the age credit.

Let's look at the mathematics behind pension splitting, demonstrating how a couple could actually save more than $10,000 simply by choosing to split one partner's pension income.

Take the case of Ontario retirees Jack (65) and Diane (60). Jack's pension income eligible for splitting was $100,000 in 2007 and he had additional investment income of $5,000, putting him above the OAS clawback level. Thus, he would have to repay all OAS benefits he received in 2007.

Diane had only $10,000 of investment income in 2007.

If Jack and Diane jointly elect to split Jack's pension income 50-50, not only will Jack's income taxes be reduced by moving income from his higher

tax bracket to Diane's lower bracket, it will have a cascading effect. Jack will be allowed to claim some of his age credit (which was entirely clawed back). And Diane will be allowed to claim both the federal and Ontario pension income credits.

The total savings for the couple, including Jack's entitlement to full 2007 Old Age Security of approximately $5,900, is more than $10,700.

So, is 50-50 the ideal split? Not necessarily. The goal is to equate the taxable incomes of both couples, but that's complicated by competing goals, such as minimizing OAS clawback and maximizing the age credit.

While the QuickTax program has numerous tax calculators and optimizers, including one for CPP splitting, Cameron Moore, spokesman for Intuit Canada, makers of QuickTax, acknowledges the lack of such an optimizer in its 2007 package. Based on customer feedback, however, he says such a tool may be considered for the 2008 tax software.

Let's hope so, because finding the ideal split can be an elusive goal.

See Chart in PDF file