Which Types of Pension Income Can Be Split in Retirement? Canada/U.S. Accounts

Written by Carson Hamill CIM®, CRPC®, Associate Portfolio Manager & Assistant Branch Manager & Dean Moro BComm, CIM®, Associate Portfolio Manager

Pension income splitting can be an effective tax-saving strategy for Canadian retirees, allowing up to 50% of eligible pension income to be transferred to a spouse or common-law partner, potentially lowering the overall family tax burden. However, the rules vary based on the type of pension or retirement income you receive. Here’s a quick look at what types of pension income qualify for splitting and those that do not.

Pension Income Splitting Eligibility

Eligible Pension Income

Eligible pension income is the key to pension income splitting. It typically includes the following:

• The taxable part of life annuity payments from a superannuation or pension fund or plan.
• RRIF or annuity payments, if the transferring spouse or common-law partner is 65 or older.
• RRSP annuity payments, if the recipient is 65 or older or if the payments are received as a result of the death of a spouse or common-law partner.
• Qualifying amounts from a retirement compensation arrangement.

These eligible pension income amounts can also qualify for the pension income amount on your tax return.

Pension Income That Is Not Eligible

Not all retirement income qualifies for income splitting. Ineligible pension income includes:

• Old Age Security (OAS) payments.
• Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) payments.
• Foreign source pension income that is tax-free in Canada due to a tax treaty, allowing you to claim a deduction at line 25600 of your return.
• Income from a United States Individual Retirement Account (IRA).
• Amounts from a RRIF transferred to an RRSP, another RRIF, or an annuity.

Additionally, variable pension benefits paid from a money purchase provision of a registered pension plan or payments out of a pooled registered pension plan do not qualify unless the transferring spouse or common-law partner is 65 or older, or the payments are received as a result of the death of a spouse or common-law partner.

Social Security Benefits

One important aspect to consider is how Social Security benefits from the United States are taxed. According to the Canada-U.S. tax treaty, Social Security benefits are only taxed in the country of residence. This means that Canadian residents receiving U.S. Social Security will pay taxes only in Canada, not in the U.S. It’s important to factor this into your retirement income planning if you receive U.S. Social Security benefits.

It is strange that CPP and OAS cannot be split, yet Social Security can be.

Foreign Pensions and Retirement Accounts

When it comes to foreign pensions and retirement accounts, the rules become more nuanced:

• Foreign pensions: Some foreign pensions may be eligible for income splitting, but eligibility varies depending on the specific tax treaty between Canada and the foreign country.
• Foreign retirement accounts: Retirement accounts like the 401(k), IRA, 403(b), and 457 plans are generally subject to different tax treatments. Some of this income may be eligible for income splitting, but other forms of retirement income from these accounts could be exempt from Canadian taxes due to treaty provisions.

Final Thoughts

Pension income splitting can be an effective way to reduce your household’s tax bill in retirement. While some income types are clearly eligible, others, particularly foreign pensions and retirement accounts, require closer examination. It’s best to consult a financial advisor or tax professional to determine the optimal strategy based on your specific retirement income sources.

By understanding which types of income can be split, retirees can take advantage of this powerful tax-planning tool to improve their financial situation during retirement.

About Snowbirds Wealth Management

Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro and Carson Hamill, associate portfolio managers with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders.

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