Pension splitting continues to be one of the hottest items on many Canadians' minds as they struggle through the preparation of their 2008 tax returns.

First introduced for the 2007 tax year, pension splitting allows Canadians who received "eligible" pension income to split up to half of that income with their spouse or common-law partner.

Naturally, pension splitting will save you tax if your spouse or partner is in a lower tax bracket. But it can even work to your advantage if you are both in the same tax bracket, but one of you is losing some of your Old Age Security (OAS) benefits due to the dreaded "clawback."

OAS payments are clawed back or reduced by 15% once your 2008 income is over $64,718; and are fully clawed back once income hits $105,266.

Consider Tony and Tina, who each had $80,000 of income in 2008. Tony, who is 68 and who had eligible pension income of $10,000, would still benefit by transferring 50% of his pension income to his wife, Tina, who is only 62. That's because even though Tina may pay tax at the same rate as Tony on the split pension income, Tony will preserve $750 of OAS otherwise clawed back. Tina, being under 65, isn't yet eligible for OAS and consequently suffers no similar clawback.

In addition, depending on the type of pension income Tony received, Tina may now be eligible to claim both federal and provincial pension income credits. Annuity-type pension payments received from an employer's pension plan will always qualify for the pension credit -- and thus pension income splitting -- regardless of your age.

RRIF withdrawals, including from locked-in plans, only qualify once you are at least age 65. Note that while a RRIF withdrawal by someone who is at least 65, such as Tony, qualifies for both the pension credit and pension splitting, Tina, the "transferee" spouse, could not claim the pension credit on the RRIF income transferred unless she was also at least 65.

On a related note, RRIF holders should keep in mind that April 14, 2009, is the deadline to re-contribute an amount to an RRSP or RRIF.

Readers will recall that last fall, Finance Minister Jim Flaherty lowered the mandatory minimum RRIF withdrawal for 2008 by 25%. This means that if you received your full RRIF minimum payment last year, you have the ability to re-contribute up to 25% of your 2008 minimum amount and claim a deduction for that amount on your 2008 tax return. The deadline is 30 days after Royal Assent, which falls on Tuesday, after adjusting for the weekend and Easter Monday.

One other note, if you re-contribute 25% of your RRIF withdrawal to an RRSP or RRIF, it's only the net amount that's eligible for the 2008 pension split.

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