In 2007 the tax rules changed allowing us to split pension income with resident spouse or common-law partner. You can transfer up to one-half of your pension income to your partner. (There is no actual transfer of funds involved here; you are simply recording your pension income on two different tax returns, yours and your partners.)
Some people have felt that as a result creating Spousal RRSP’s were no longer necessary because of their ability to split pension income. However if we examine the situation you may come to different conclusions.
First, what if you decide to retire early? At that stage neither of you will be eligible to have a pension so there is nothing to split. Remember that withdrawals from your RRSP’s do not constitute a pension. So if one partner has a large RRSP and the other no RRSP, all the income will be attributed to one person and the tax bill will be higher.
If on the other hand you have set up a balance between your RRSP and the Spousal RRSP you will be able to withdraw funds from each and reduce your taxes.
A second consideration is to look at what the pension income will be. If it is a small pension, income splitting will balance the tax on the pension, but where will the rest of your income be drawn from? Likely your RRSP’s and once again balancing the income from each partner’s RRSP’s will be important to minimize tax.
If you and your partner are in the same tax bracket pension splitting may still be useful as it could create a pension tax credit for the person to whom the split-pension has been transferred. There is a federal income tax credit on the first $2000 of eligible pension income.
Some planning tips; Look down the road to get an estimate of where your retirement income will be generated. Use Spousal RRSP’s to balance RRSP contributions if necessary. Decide in advance about pension splitting, because both partners have to agree to the arrangement and complete tax forms to that effect.