Income Splitting in Canada – The Complete Guide

Income splitting in Canada can be an important retirement tax-planning strategy for couples. It can allow eligible pension income to be allocated between spouses or common-law partners, potentially reducing the household's overall tax burden.

But income splitting is not as simple as moving any type of income from one spouse to another. The Canada Revenue Agency (CRA) has specific rules about what income qualifies, who can split it, how much can be transferred, and how the election is made.

What Is Income Splitting in Canada?

Income splitting generally means allocating certain types of income between spouses or common-law partners for tax purposes. Because Canada's income-tax system uses progressive tax rates, two people with similar total household income can sometimes pay less combined tax than they would if most of that income were reported by only one person.

The most important retirement version is pension income splitting. Since 2007, eligible couples have been able to jointly elect to split up to 50% of eligible pension income for tax purposes.

It is important to understand that pension income splitting is not the same thing as physically transferring money between spouses. The election changes how eligible income is reported for tax purposes.

Why Does Income Splitting Matter in Retirement?

Retirement income can be distributed very unevenly between spouses. One partner may have a large defined-benefit pension, while the other may have relatively little pension income. Another couple might have similar government benefits but very different RRIF withdrawal amounts.

Pension income splitting can help make the taxable income reported by each spouse more balanced. Depending on the circumstances, that may reduce the combined tax bill and may also affect certain income-tested benefits and credits.

• Potentially lower household taxes: Moving eligible pension income to a lower-income spouse may reduce the combined marginal tax burden.
• Better income balance: Couples can potentially distribute eligible retirement income more evenly.
• Possible benefit impacts: Because some benefits and credits depend on an individual's net income, pension splitting can affect items such as the OAS recovery tax and certain tax credits.
• More flexibility in retirement planning: Couples can evaluate different withdrawal and pension strategies rather than automatically taking the same amount of income every year.

The actual tax benefit depends on each couple's income, province or territory, age, eligible income sources, credits, deductions and government benefits. There is no universal dollar amount that every couple will save.

What Income Can Be Split Between Spouses in Canada?

Not all retirement income qualifies for CRA pension income splitting. The type of income and the circumstances in which it was received matter.

Eligible pension income can include certain payments from registered pension plans, annuities and RRIFs, subject to the applicable rules. In particular, RRIF income generally qualifies when the recipient is 65 or older at the end of the year, although there are additional rules for certain amounts received following the death of a spouse or common-law partner.

CRA's rules also distinguish pension income that qualifies for pension income splitting from income that merely happens to be retirement-related.

For a more detailed discussion, see our guide to what income can be split between spouses in Canada .

Pension Income Splitting

Pension income splitting is the primary tax-based income-splitting strategy used by Canadian retirees.

If the requirements are met, spouses or common-law partners can jointly elect to allocate up to 50% of eligible pension income from one partner to the other. The receiving spouse does not need to be 65 for the election to be possible.

Eligible income can include certain pension-plan payments, annuity income and qualifying RRIF income. CPP and OAS are different: they are not eligible pension income for CRA's pension income-splitting election.

Learn more in our detailed guide to pension income splitting.

How Much Pension Income Can You Split?

The maximum amount that can be allocated under the CRA pension income-splitting rules is 50% of the eligible pension income of the transferring spouse or common-law partner.

You do not necessarily have to split 50%. The couple can choose a different percentage when making the election, depending on what produces the desired tax result.

If both partners have eligible pension income, they must determine which partner will be the transferring spouse for the particular election. Only one joint pension-income-splitting election can be made for a tax year.

How Do You Elect Pension Income Splitting?

Pension income splitting is not automatic. Both spouses or common-law partners must make a joint election.

The election is made using Form T1032, Joint Election to Split Pension Income. The information reported by both spouses must agree.

The election is made for each tax year. The percentage chosen in one year does not have to be the same percentage chosen in another year.

The CRA may permit certain late, amended or revoked elections in specific circumstances, subject to its rules and deadlines.

What About CPP? CPP Pension Sharing Is Different

One of the most common sources of confusion is the difference between CRA pension income splitting and CPP pension sharing.

CPP retirement pensions can be shared between eligible spouses or common-law partners through Service Canada. This is a separate program from the CRA pension income-splitting election.

To qualify for CPP pension sharing, the couple generally must be living together and either partner must be receiving, or have applied for, a CPP retirement pension.

If both partners have CPP pensions, the combined amount of their two pensions does not increase simply because they choose to share them. Pension sharing changes how the pensions are allocated between the partners and may result in tax savings.

For more information, see our article on CPP pension sharing.

Does OAS Qualify for Income Splitting?

Old Age Security (OAS) is not eligible for CRA pension income splitting. The same is true of CPP and Quebec Pension Plan benefits.

However, pension income splitting can still affect OAS-related taxation because the allocation changes each spouse's individual net income. In particular, it can affect the calculation of the OAS recovery tax, commonly called the OAS clawback.

This means pension splitting should be considered as part of a broader retirement-income strategy rather than simply as a way to reduce the basic income tax bill.

Learn more about the OAS clawback.

Tax on Split Income (TOSI)

Tax on Split Income (TOSI) is a separate set of Canadian tax rules. TOSI was introduced to restrict certain forms of income sprinkling, particularly income from private corporations and certain related-business arrangements.

TOSI should not be confused with legitimate pension income splitting between spouses or common-law partners. A valid CRA pension income-splitting election is governed by its own rules.

You can read more about this topic in what is tax on split income .

Who Is Eligible for Income Splitting in Canada?

Eligibility depends on the type of income being split and the specific rules that apply. For CRA pension income splitting, the election is available to eligible married couples and common-law partners who meet the applicable requirements.

For example, CRA generally requires both partners to have been residents of Canada on December 31 of the tax year, subject to the specific rules that apply in cases involving death. The partners also generally cannot have been living separate and apart because of a relationship breakdown for a continuous period of 90 days or more that includes December 31.

Common-law partners can qualify. The fact that a couple is not legally married does not automatically prevent pension income splitting.

Learn more in our article: who is eligible for income splitting in Canada .

When Should You Consider Income Splitting?

There is no single age or income level at which every couple should split income. The potential benefit depends on the sources and timing of each partner's retirement income.

• Before retirement: Spousal RRSP contributions can be one way of building more balanced retirement income, although attribution rules apply.
• At retirement: Review which pension income will qualify for splitting and how the election could affect both spouses' taxes.
• During RRIF years: Consider how eligible RRIF withdrawals interact with other income and government benefits.
• When incomes are very different: A larger difference between spouses' taxable incomes can create more opportunity for tax planning, although the actual result must be calculated.

See our related article: when should I use income splitting in Canada .

Income Splitting and Retirement Planning

Income splitting is particularly useful when it is considered alongside a complete retirement-income plan.

Retirementize's retirement calculator incorporates retirement income and tax calculations so you can evaluate how different income sources affect your projected after-tax retirement cash flow.

For example, a couple with significantly different pension or RRIF income can examine how changing the distribution of eligible income affects their projected taxes and retirement income.

You can also combine income-splitting analysis with strategies such as RRSP meltdown planning and the 4% rule.

You can also see a real-life detailed example of retirement income splitting to compare how different income distributions can affect a retirement plan.

Common Income-Splitting Mistakes

• Assuming all retirement income qualifies: CPP, OAS and many other types of income do not qualify for CRA pension income splitting.
• Confusing CPP pension sharing with pension income splitting: They are separate programs administered through different processes.
• Assuming 50% must always be split: The maximum is generally 50%, but couples can choose a lower percentage.
• Forgetting the annual election: Pension income splitting requires a joint election for the applicable tax year.
• Ignoring government benefits: Changing each spouse's net income can affect income-tested benefits, credits and the OAS recovery tax.
• Assuming splitting always saves money: The result depends on the couple's complete tax situation.

FAQs About Income Splitting in Canada

• Can you split CPP income? CPP retirement pensions can be shared between eligible spouses or common-law partners through Service Canada. This is different from CRA pension income splitting.
• What is the maximum amount of pension income that can be split? Generally, up to 50% of eligible pension income can be allocated to a spouse or common-law partner.
• Do common-law partners qualify? Yes. Eligible common-law partners can use pension income splitting when they meet the CRA requirements.
• Is pension income splitting automatic? No. Both partners must make the required joint election.
• Can the percentage change from year to year? Yes. The percentage chosen for one tax year does not have to be the same in another year, provided the applicable rules are met.
• Can you split OAS? No. OAS is not eligible for CRA pension income splitting.
• Can you split CPP under the CRA pension-splitting rules? No. CPP is not eligible pension income for the CRA pension income-splitting election. CPP retirement pensions can instead be shared through the separate Service Canada pension-sharing program.

Conclusion

Income splitting can be an important part of Canadian retirement tax planning, but it works best when the rules are understood clearly. The biggest opportunity generally comes from eligible pension income, while CPP pension sharing provides a separate way for eligible couples to redistribute CPP retirement pensions.

The key is to look at the entire retirement-income picture. Pension income, RRIF withdrawals, CPP, OAS, investment income, taxes and income-tested benefits can all interact with one another.

Retirementize can help you model your retirement income and taxes so you can see how different income strategies may affect your projected after-tax retirement income.

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