Pension Income Splitting: An Imperfect Solution to an Unclear Problem

Abstract

In 2006, the federal government announced the "Tax Fairness Plan", which introduced pension income splitting into the Income Tax Act. Pension income splitting allows a recipient of a pensioner to notionally transfer up to half of their pension income to their spouse. This paper will argue that pension income splitting is questionable tax policy that should be reconsidered. The first section of this paper will examine the normative justifications for pension income splitting. The following section will examine how pension income splitting works and who can benefit from it. Section three will show that pension income splitting is a suboptimal solution and provide a better alternative. The fourth section will explain why pension income splitting was implemented. The fifth section will look at pension income splitting from alternative perspectives. The final section will look at the future of pension income splitting.

Keywords: Pension Income Splitting, Income Tax, Canada

JEL Classification: K34