17 – GENERAL TAX DEDUCTIONS INCLUDING SENIOR PENSION INCOME SPLITTING

Introduction to Deductions in Canadian Income Tax
Understanding the Pension Adjustment (PA) on the Canadian Tax Return
Deducting Union and Professional Dues on a Canadian Tax Return
Pension Income Splitting for Seniors in CanadaUnderstanding the T1032 Election to Split Pension Income
Example of Pension Income Splitting for Seniors and the T1032

Introduction to Deductions in Canadian Income Tax

When preparing Canadian tax returns, one of the most exciting (and important) areas to understand is deductions. Up to this point, you may have focused mainly on types of income — employment, investment, or business income — but now it’s time to learn how taxpayers can reduce their taxable income through legitimate deductions.

This section gives a beginner-friendly overview of what deductions are, why they matter, and introduces the main types of deductions you’ll encounter as a tax preparer — including RRSPs, child care expenses, moving expenses, and pension income splitting for seniors.

💡 What Are Deductions?

A deduction is an amount that a taxpayer can subtract from their total income before calculating tax. Deductions reduce the portion of income that is subject to tax — this is called taxable income.

For example:
If someone earned $60,000 in income and claimed $10,000 in deductions, they only pay tax on $50,000.

This is different from a tax credit, which reduces the tax owed directly (we’ll cover credits in the next module).

Because deductions lower taxable income, their value depends on the taxpayer’s marginal tax rate — the higher the income, the more valuable a deduction becomes.

🧾 Where Deductions Appear on the T1 Return

On the T1 General (Income Tax and Benefit Return), deductions are typically found in the 200 series of line numbers.

Line 15000 shows total income.
Deductions (lines 20000 to 23500 and beyond) are subtracted from total income to arrive at net income.
Further deductions may reduce that to taxable income, which determines how much tax is owed.

Understanding where and how these deductions fit on the return will help you see the “flow” of the tax calculation — from income, to deductions, to credits, to final tax payable.

🏦 1. The Registered Retirement Savings Plan (RRSP)

The RRSP is one of the most common and powerful deductions in the Canadian tax system.

When a taxpayer contributes to an RRSP, they can deduct the contribution from their income for that year, reducing their taxable income and, in turn, their tax bill.

Key points to remember:

Contributions made during the year and up to 60 days after year-end can be deducted.
The deduction limit is based on 18% of earned income from the previous year, up to a set maximum (updated annually by CRA).
Unused contribution room carries forward to future years.

Why it matters:

The taxpayer saves tax now by deducting the contribution.
The money grows tax-deferred inside the RRSP.
Withdrawals are taxed later, usually when the person is retired and in a lower tax bracket.

RRSPs also have two special programs that allow withdrawals without immediate tax:

Home Buyers’ Plan (HBP): Withdraw funds to buy a first home; must be repaid over 15 years.
Lifelong Learning Plan (LLP): Withdraw funds for education; must be repaid over 10 years.

👶 2. Child Care Expenses

Parents or guardians who pay for child care so they can work, run a business, or attend school can deduct eligible child care expenses.

Common eligible expenses include:

Daycare or nursery school fees
Caregivers or babysitters
Summer day camps
Before- and after-school programs

Rules to remember:

The deduction is usually claimed by the lower-income spouse (to prevent higher earners from taking advantage unfairly).
There are maximum deduction limits per child depending on their age and disability status (for example, $8,000 for children under 7).
Receipts are required to support the claim.

🚚 3. Moving Expenses

If a taxpayer moves at least 40 kilometres closer to a new workplace, business location, or eligible school, they may be able to deduct reasonable moving expenses.

Eligible expenses can include:

Transportation and storage costs (truck rental, movers, etc.)
Temporary accommodation
Costs of cancelling a lease
Real estate commissions on the sale of the old home

Important:

Moving expenses can only be deducted against income earned at the new location — for example, employment income from a new job or self-employment income from a new business.

📉 4. Business Investment Losses

Sometimes, taxpayers invest in a business or corporation that fails. If that investment becomes worthless, the resulting loss may be deductible as a business investment loss.

This type of loss can reduce other sources of income and can sometimes be carried back or forward to other years to offset income. These are more complex cases but are useful to recognize as a tax preparer.

👵 5. Pension Income Splitting for Seniors

One of the most valuable deductions available to seniors is pension income splitting.

Married or common-law couples can split up to 50% of eligible pension income between them to lower their combined tax bill.

Example:

If one spouse has $60,000 in pension income and the other has little or no income, they can elect to split up to $30,000.
This shifts income to the lower-income spouse, reducing the couple’s overall tax payable.

To make this election, both spouses must agree and file a joint election form (T1032) with their returns.

Pension income splitting can also affect other benefits, such as the Age Amount or Old Age Security (OAS) clawback, so it’s an important planning tool for seniors.

🧮 How Deductions Fit into the Bigger Picture

Here’s a simplified overview of how deductions work in the tax calculation:

Total Income (line 15000)
→ minus Allowable Deductions (lines 20000–23500)
= Net Income (line 23600)
→ minus Additional Deductions (like RRSPs, moving, etc.)
= Taxable Income (line 26000)
→ apply Tax Rates
→ subtract Tax Credits
= Final Tax Payable

Deductions come before tax credits and can often produce larger savings because they directly reduce taxable income.

🧭 Key Takeaways for Beginners

Deductions reduce taxable income; credits reduce tax payable.
RRSP contributions are the most common and valuable deduction.
Child care expenses and moving expenses help working families.
Pension income splitting benefits senior couples and can lower their tax burden.
Deductions are listed in the 200-series on the T1 General return.

Understanding these basic rules will help you recognize which deductions apply to each client and ensure they get the full benefit they’re entitled to.

Understanding the Pension Adjustment (PA) on the Canadian Tax Return

When preparing Canadian tax returns, you’ll often come across a value called the Pension Adjustment (PA) on a taxpayer’s T4 slip. For beginners, this number can be confusing because it doesn’t directly change the taxpayer’s income or deductions — yet it plays an important role in determining how much they can contribute to their RRSP (Registered Retirement Savings Plan) in the future.

Let’s go step-by-step to understand what the pension adjustment is, where it comes from, and how it affects a taxpayer’s RRSP contribution limit.

💡 What Is a Pension Adjustment?

The Pension Adjustment (PA) measures the value of the pension benefits an employee earned during the year through their employer’s registered pension plan (RPP) or deferred profit-sharing plan (DPSP).

In simple terms, the PA represents the retirement savings built up at work — either through the employee’s own contributions, the employer’s contributions, or both.

The Canada Revenue Agency (CRA) uses this amount to ensure that people who have generous employer pension plans don’t also get a full RRSP contribution room, which would give them an unfair advantage in building retirement savings.

🧾 Where Do You Find the Pension Adjustment?

You’ll find the PA on the T4 slip, reported in Box 52.

When you prepare a return, you’ll also notice this amount is entered on Line 20600 of the T1 General return — but remember, it’s for reporting only. It does not reduce income or affect tax payable directly.

It simply informs the CRA how much pension benefit the person earned so they can calculate next year’s RRSP contribution limit correctly.

🏦 Why the Pension Adjustment Exists

To understand the reason behind the PA, it helps to look at how RRSP contribution limits are determined.

Normally, a person can contribute up to 18% of their earned income (up to an annual maximum set by CRA) to an RRSP.

However, if someone is part of a workplace pension plan, they’re already earning tax-deferred retirement savings through that plan. If they were also allowed to contribute a full 18% to an RRSP, they’d be receiving double the tax advantage — one through their pension, and another through the RRSP.

To prevent this, the government “adjusts” the RRSP limit by the value of the pension benefit — the Pension Adjustment.

📉 Example: How the Pension Adjustment Affects RRSP Room

Let’s use a simple example to see how this works.

Example:
Maria earns $100,000 a year and is part of a workplace pension plan.

Normally, her RRSP limit would be 18% of $100,000 = $18,000.
Her T4 shows a Pension Adjustment of $8,000 (Box 52).

To calculate her RRSP contribution room:

$18,000 (maximum allowable)
– $8,000 (Pension Adjustment)
= $10,000 remaining RRSP room

So, Maria can contribute up to $10,000 to her own RRSP for that year.

If another employee without a pension earned the same $100,000, that person would have the full $18,000 RRSP limit available.

🧮 Understanding the Relationship Between Pension Contributions and the PA

On the T4, you may also see:

Box 20 – RPP Contributions: The amount the employee contributed to the company’s pension plan.
Box 52 – Pension Adjustment: The total value of both employee and employer contributions, or the equivalent value of benefits accrued during the year.

The PA is usually larger than Box 20, because it includes the employer’s matching portion or other pension benefits earned.

Example:

Employee contributed: $6,720 (Box 20)
Employer matched 50%: $3,360
Total pension benefit (PA): $10,080 (Box 52)

This total represents the amount that will reduce next year’s RRSP room.

⚙️ How It Appears on the T1 Return

When you enter T4 details, the Pension Adjustment (Box 52) is reported on Line 20600 of the T1 return.

However, this line is informational only — it doesn’t change income, deductions, or tax payable for the current year.

Its purpose is to help CRA track your RRSP deduction limit, which is displayed on the Notice of Assessment the taxpayer receives after filing their return.

🗓️ When Does It Affect the Taxpayer?

The impact of the PA shows up the following year, when the CRA recalculates the taxpayer’s RRSP deduction limit.

You can always see the updated limit on the Notice of Assessment or through the CRA My Account portal. The limit is based on:

Earned income from the previous year,
The 18% rule,
The Pension Adjustment (Box 52), and
Any unused RRSP room carried forward.

🧠 Key Takeaways for Tax Preparers

The Pension Adjustment (PA) is reported in Box 52 of the T4 slip.
It represents the value of pension benefits accrued in an employer-sponsored plan.
It appears on Line 20600 of the T1 return for reporting purposes only — it does not affect taxable income directly.
The PA reduces the taxpayer’s RRSP contribution limit for the following year.
The CRA automatically calculates this adjustment when issuing the Notice of Assessment.

📘 Summary

Item	Box/Line	Purpose
Pension Adjustment (PA)	Box 52 (T4) / Line 20600 (T1)	Reports the value of employer pension benefits earned; does not reduce income
RPP Contributions	Box 20 (T4)	Employee’s actual pension contributions — these are deductible
Effect on RRSP	Shown in next year’s Notice of Assessment	Reduces the RRSP contribution limit

In short, the Pension Adjustment ensures fairness in Canada’s retirement savings system. It prevents taxpayers with employer pension plans from claiming extra RRSP room, keeping the overall 18% retirement savings rule consistent for everyone.

Understanding how to identify and explain the PA will help you as a tax preparer ensure clients correctly interpret their T4s and RRSP limits — a small detail that makes a big difference in retirement planning.

Deducting Union and Professional Dues on a Canadian Tax Return

When preparing a Canadian income tax return, one of the most common deductions you’ll encounter for employed individuals is union and professional dues. These are amounts that taxpayers pay as part of their employment, and in most cases, they are fully deductible from income. Let’s go step by step to understand what these deductions are, where they appear, and what the CRA allows.

1. What Are Union Dues?

Union dues are fees paid by employees who are members of a union. These dues are typically deducted directly from the employee’s paycheque and remitted to the union by the employer.

On the T4 slip, union dues are usually shown in Box 44 – Union Dues.

These dues are fully deductible on the individual’s tax return. The deduction is entered on Line 21200 (Union, professional, or like dues) of the T1 General Income Tax and Benefit Return.

This deduction directly reduces the person’s net income, which means it can lower the amount of tax they owe.

2. What Are Professional Dues?

Not all workers belong to unions — but many professions require members to pay annual dues to maintain their professional status or license. These are called professional dues or professional fees.

Examples include:

A chartered professional accountant (CPA) paying annual CPA membership fees
A registered nurse paying their college registration dues
A human resources professional paying HRPA membership fees
A licensed carpenter or electrician paying association dues

These dues are also deductible, but only if the person is currently working in that profession and the dues are necessary to earn income from that employment.

3. Liability Insurance Premiums

In some professions, individuals must carry liability insurance as a condition of their employment or professional membership (for example, doctors, lawyers, or engineers).

If the liability insurance is required and directly related to the taxpayer’s current employment, it is deductible on Line 21200 as well.

However, personal insurance or optional coverage not required by the employer or professional body is not deductible.

4. When Dues Are Not Deductible

The CRA allows deductions only when the expense is necessary to earn income.
Here are some common situations where deductions are not allowed:

Paying membership dues to a professional organization if the person is no longer working in that field.
Example: Someone who used to work as an HR professional but now owns a restaurant — HRPA dues are not deductible anymore.
Paying for exam fees, training costs, or courses unless the employer required them as a condition of employment.
Paying for optional memberships that are not mandatory to perform the job.

If CRA reviews a return and finds dues that do not meet this “necessary to earn income” condition, they can deny the deduction.

5. Documentation and Proof

When claiming union or professional dues, taxpayers should keep all receipts or statements that confirm:

The amount paid
The year in which it was paid
The purpose of the payment (union dues, membership fees, or liability insurance)

If the dues are not shown on the T4 slip (for example, if the professional body billed the individual directly), the taxpayer must have the official receipt or statement to support the deduction.

6. Quick Reference Summary

Type of Expense	Where Found	Deductible?	Reported On
Union dues	Box 44 of T4	Yes	Line 21200
Professional association dues	Membership receipt	Yes, if related to employment	Line 21200
Liability insurance (required by profession)	Receipt or invoice	Yes	Line 21200
Exam or course fees	Receipt	Only if required by employer	Line 21200 (if allowed)
Dues for unrelated professions	Receipt	No	N/A

7. Key Takeaways for New Tax Preparers

Always check Box 44 on the T4 for union dues.
Ask the client if they paid any additional professional dues not shown on the T4.
Ensure that dues are related to the current occupation — not just a previous or unrelated field.
Keep documentation for all amounts claimed in case CRA requests proof.
Remember: these amounts reduce taxable income, not just tax payable — so they provide real savings.

By understanding the rules around union and professional dues, you’ll be able to confidently claim these deductions for your clients and ensure they get the full tax benefit they’re entitled to — while staying compliant with CRA guidelines.

Pension Income Splitting for Seniors in Canada
Understanding the T1032 Election to Split Pension Income

When preparing Canadian tax returns for seniors, one of the most valuable opportunities for tax savings is pension income splitting. This tax rule allows eligible couples to shift part of one spouse’s pension income to the other — reducing their overall combined tax bill.

Although this deduction appears in the “deduction” section of the tax return, pension income splitting actually involves both reporting income and claiming a corresponding deduction, which is why it can seem confusing at first. Let’s break it down step by step.

1. What Is Pension Income Splitting?

Pension income splitting allows a taxpayer (usually a senior receiving pension income) to allocate up to 50% of their eligible pension income to their spouse or common-law partner for tax purposes.

This doesn’t mean any money is actually transferred between them. It’s simply an income allocation on paper — done through a form called the T1032 – Joint Election to Split Pension Income.

By splitting pension income, couples can take advantage of lower tax rates and increase certain credits (like the age amount and pension income amount), potentially saving hundreds or even thousands of dollars in tax.

2. Why Pension Income Splitting Was Introduced

Before 2007, couples where one spouse had a large pension and the other had little or no income often faced high taxes. The government introduced pension income splitting to make taxation fairer for seniors, recognizing that both spouses often depend on the same pension for retirement income.

The change allows the couple to effectively “share” pension income on their returns — lowering the total tax paid as a household.

3. Who Can Use Pension Income Splitting?

To qualify for pension income splitting, all the following conditions must be met:

Marital status: The couple must be married or common-law partners on December 31 of the tax year.
Residency: Both must be residents of Canada at the end of the year.
Eligible pension income: The income being split must qualify (see section below).
Age requirement:
- Usually, the pensioner must be 65 or older to have income that qualifies.
- In limited cases, pension splitting can apply before age 65 (for example, if the income comes from a registered company pension plan or certain foreign pensions).

4. Eligible vs. Non-Eligible Pension Income

Not all pension income can be split. The CRA only allows splitting for eligible pension income, typically received after age 65.

Type of Income	Eligible for Splitting?	Notes
Registered company pension (superannuation or pension plan)	✅ Yes	Common source for many retirees
Registered Retirement Income Fund (RRIF) withdrawals (age 65+)	✅ Yes	Only after the taxpayer turns 65
Life annuity payments from an RRSP or deferred profit-sharing plan	✅ Yes	Taxable portion only
Old Age Security (OAS)	❌ No	Cannot be split
Canada Pension Plan (CPP) / Quebec Pension Plan (QPP)	❌ No	Can be shared only through a separate CRA or Retraite Québec application
Tax-free foreign pensions	❌ No	Not eligible because they are non-taxable in Canada
U.S. IRA income	⚠️ Depends	Only taxable portions may qualify under the Canada-U.S. tax treaty

If the income is taxable in Canada and reported on the return, it may be eligible to split — but tax-free foreign pensions or benefits are never eligible.

5. How the Election Works (Form T1032)

To officially split pension income, both spouses must jointly complete the T1032 – Joint Election to Split Pension Income form.

The spouse who receives the pension is called the “transferor” (or pensioner).
The spouse receiving the allocated portion is the “transferee”.

They can choose to split any percentage up to 50% of the eligible pension income — whichever amount produces the best overall tax savings.

After the election:

The transferor’s income is reduced by the amount transferred.
The transferee’s income increases by the same amount.
The transferee also claims a deduction for the amount transferred, ensuring that income isn’t taxed twice.

No actual money is exchanged between the spouses — this is strictly a paper adjustment for tax purposes.

6. When and How to File the Election

The T1032 form must be filed with both spouses’ returns for the same tax year.
Both spouses must sign the form.
If the CRA requests to see it later, taxpayers must be able to produce a signed copy.

If one spouse dies during the year, or if a couple separates before year-end, special rules apply — but generally, pension splitting is allowed as long as the couple was married or common-law on December 31 of the tax year.

7. Tax Benefits of Pension Splitting

Pension income splitting can result in:

Lower overall family tax payable (by moving income to the lower-income spouse).
Reduced exposure to Old Age Security (OAS) clawback if the higher-income spouse’s net income is reduced below the clawback threshold.
Increased eligibility for certain tax credits, such as the age amount, pension income amount, and the spousal amount.

The overall benefit depends on each spouse’s income level and available credits.

8. Important Points to Remember

Only up to 50% of eligible pension income can be split.
Both spouses must agree and sign the election.
OAS and CPP/QPP cannot be split using this method.
If one spouse’s income changes (for example, they forgot to include a slip), the pension split may need to be recalculated.
CRA’s systems automatically verify the T1032 details when processing both returns.

9. Simple Example (for understanding)

Example:
David (age 70) receives a company pension of $40,000 per year. His wife, Linda, has no pension income.

They decide to split 50% of David’s pension income.

David reports $20,000 as pension income.
Linda reports $20,000 as pension income.

By doing this, David’s taxable income drops into a lower bracket, and Linda uses up her lower tax rate. Their combined tax bill is significantly reduced — even though no money actually changed hands.

10. Summary Table

Key Detail	Description
CRA form used	T1032 – Joint Election to Split Pension Income
Maximum split	Up to 50% of eligible pension income
Who can split	Married or common-law couples, resident in Canada
Main benefit	Lowers total family tax, can increase tax credits
Excluded incomes	OAS, CPP/QPP, tax-free foreign pensions
Filing requirement	Signed election filed with both returns

11. Final Thoughts

Pension income splitting is one of the most powerful tools for reducing taxes in retirement. As a tax preparer, it’s important to:

Confirm that the pension income is eligible,
Ensure the couple meets all residency and relationship requirements, and
Properly record the election using the T1032 form.

Even though the mechanics can seem complex, once you understand the eligibility and purpose, this deduction becomes one of the most rewarding parts of senior tax preparation.

Example of Pension Income Splitting for Seniors and the T1032

Now that we understand the concept of pension income splitting and who is eligible, let’s walk through a practical example to see how it works in real life.

Pension income splitting can be one of the biggest tax-saving opportunities available to senior couples in Canada. It allows a couple to move up to 50% of eligible pension income from the higher-income spouse to the lower-income spouse to reduce their total combined tax bill.

The Scenario

Let’s consider a common example involving a senior couple, James and Francis.

Both are retired and live in Canada.
They are married and file their taxes separately, but they are both eligible for pension income splitting.
Francis receives a large pension from her previous job, while James has a much smaller pension income.

Here’s a summary of their situation:

Person	Pension Income	Other Income	Total Income Before Split
Francis	$73,885	–	$73,885
James	$26,691	–	$26,691

Without pension income splitting, Francis would pay a much higher rate of tax because her income falls into a higher tax bracket, while James would pay much less because of his lower income.

To help balance things out, they decide to split some of Francis’s pension income with James.

How the Pension Income Split Works

The maximum amount that can be split is 50% of the eligible pension income. However, couples can choose any amount up to that limit depending on what gives them the best overall tax result.

In this example, the couple decides to transfer $20,164 of Francis’s eligible pension income to James.

Here’s how the adjusted income would look:

Person	Income Before Split	Pension Income Transferred	New Income After Split
Francis	$73,885	–$20,164	$53,721
James	$26,691	+$20,164	$46,855

This adjustment brings their incomes closer together and reduces the amount of tax Francis has to pay while slightly increasing James’s income. The combined effect usually results in overall tax savings for the couple.

In this example, their total tax payable dropped by roughly $2,000 after applying the pension split — a significant savings simply by balancing the income between spouses.

Reporting Pension Splitting on the Tax Return

To report the pension income split, both spouses must complete and sign Form T1032 – Joint Election to Split Pension Income.

Here’s how it works in practice:

Determine who is the “pensioner” and who is the “transferee.”
- The pensioner is the spouse who actually received the eligible pension income (Francis in this case).
- The transferee is the spouse who will receive part of that income for tax purposes (James).
Complete Form T1032 (Joint Election).
- This form is used to record how much pension income is being transferred.
- Both spouses’ personal details are entered, and the amount of income being split is shown.
- The form must be signed by both spouses, confirming that they agree to the election.
Report the split on each spouse’s tax return:
- On the pensioner’s return, the split amount is deducted on line 21000 (Deduction for elected split-pension amount).
- On the transferee’s return, the same amount is added as income on line 11600 (Elected split-pension amount).
Tax withheld can also be split.
- If tax was withheld on the pension income (for example, shown on a T4A slip), that amount can also be split between the spouses in the same proportion as the pension income.
- This ensures fairness — so that the spouse receiving more income from the split also gets a share of the tax already withheld.

Important Points to Remember

Pension splitting is optional, but it’s often highly beneficial for senior couples where one spouse earns much more than the other.
The couple can choose any percentage up to 50% — they don’t have to split the full half.
The election must be made each year, and the amount can change annually depending on the couple’s income.
Both spouses must sign the T1032 form. If either one fails to sign, the Canada Revenue Agency (CRA) will disallow the election.
Old Age Security (OAS) and Canada Pension Plan (CPP) income cannot be split using this method. They have separate processes for sharing or splitting.
Pension splitting affects tax brackets, credits, and installment payments, so it should be carefully planned to get the best overall outcome.

The Bottom Line

Pension income splitting is a powerful tool for reducing taxes in retirement. By transferring part of one spouse’s pension income to the other, couples can take advantage of lower combined tax rates and increase their after-tax income.

Even though the process might sound complex, it’s simply an election using the T1032 form, and no money actually changes hands — it’s just a paper adjustment for tax purposes.

For any new tax preparer, understanding this concept is key to helping senior clients maximize their tax savings each year.