To be clear, does "pension splitting" mean that this couple can in fact claim a pension of $62 400 each as opposed to $120k for the man and $4800 for his wife? And they thus end up saving on taxes because $60k is taxed (twice) at a lower rate than $120k would be? Just trying to understand.
Pension splitting refers to splitting pension income as defined at line 115 of one's tax return (the most important distinctions here are that OAS and CPP are not reported at line 115, CPP can be split at source, OAS is never split, if you are 65 and draw money from your RRSP then it is not on line 115 therefore it can't be split but if you tell your bank to move that money into a RRIF and then take it out then you can split it with your spouse, etc).
So, the guy earns a $120,000 pension (defined benefit plan) from when he worked at Air Canada.
He earns a CPP pension of ~$9,600 (I can't remember the exact figure and it doesn't really matter if I'm out by $1,000 anyway).
So, he phoned up Services Canada (HRDC in the old days) and got them to split the CPP.
He and his wife each earn the OAS at $6,400 each (this is not split - they earn it for being good Canadian residents all their lives and it doesn't matter whether the wife every worked or paid a dime of tax in her life because she still gets it).
So, they each basically have the same income - $4,800 each from CPP, $6,400 from OAS, and $60,000 each from his pension.
Both pay a wee bit of OAS clawback but due to progressive tax brackets and a huge reduction in his OAS clawback they save $10,000 in taxes each year.
To be precise - using 2011 figures for a BC resident:
Without pension splitting (the Air Canada pension) - total tax bill (including BC, Federal, and OAS Clawback) - $40,449.72
With pension splitting - $30,041.28.
Tax/OAS clawback savings of $10,408.44.
But, hey, better for this couple to save $10,000 and have everybody wait to 67 to get the OAS, right?