Mr. Henderson, 66, has $40,000 in eligible pension income from an annuity, and his spouse, Mrs. Henderson, 65, has no pension income. They both have other income that places them in different tax brackets. To minimize their combined tax liability, what is the optimal amount of Mr. Henderson's pension income to split with Mrs. Henderson?

Question: Mr. Henderson, 66, has $40,000 in eligible pension income from an annuity, and his spouse, Mrs. Henderson, 65, has no pension income. They both have other income that places them in different tax brackets. To minimize their combined tax liability, what is the optimal amount of Mr. Henderson's pension income to split with Mrs. Henderson?

Answer options:

• $0
• $10,000 ✅ $20,000
• $40,000

Correct answer: $20,000

Explanation: Under the Income Tax Act, up to 50% of an individual's eligible pension income can be split with a spouse or common-law partner if both are 65 or older. Splitting $20,000 (50% of $40,000) from the higher-income spouse to the lower-income spouse maximizes the benefit of pension income splitting by equalizing taxable income, subject to the 50% limit.