Income Splitting in Canada – The Complete Guide

Income splitting in Canada is a powerful tax strategy that allows couples to lower their total tax bill by shifting income from the higher-income spouse to the lower-income spouse. If you’ve ever wondered who is eligible for income splitting, what income qualifies, or how much tax it can save you, this is the guide for you. Even better, the Retirementize online income calculator already considers income splitting when projecting your retirement income, so you can see exactly how it affects your future finances.

What is Income Splitting in Canada?

Income splitting means redistributing taxable income between spouses or common-law partners to minimize household taxes. Canada’s tax system is progressive, meaning the more you earn, the higher your marginal tax rate. By shifting income to a spouse in a lower tax bracket, couples can pay less in combined taxes.

The concept became popular when pension income splitting was introduced in 2007. Later, family income splitting for households with kids under 18 was introduced in 2014 but repealed in 2016. Today, the focus remains primarily on pension and retirement-related income splitting.

Benefits of Income Splitting

The benefits go beyond just paying fewer taxes. Here’s why Canadian couples take it seriously:

• Lower taxes: Shifting income to the lower-earning spouse reduces the total tax bill.
• Optimize government benefits: Avoid or reduce clawbacks on Old Age Security (OAS) and maximize credits like the age amount or pension credit.
• Retirement income balance: Smooth out RRIF withdrawals to avoid large tax hits.

Example: If one spouse earns $80,000 in retirement income and the other earns $20,000, their household may pay around $8,000 less in taxes by splitting 50% of eligible income. That’s money that could fund travel, hobbies, or even cover the rising cost of healthcare in retirement (read why retirement gets harder the longer you wait).

What Income Can Be Split Between Spouses in Canada?

Not all income is created equal when it comes to splitting. CRA has strict rules on what qualifies. For a full breakdown, see our article on what income can be split between spouses in Canada.

• Qualifies: Pension income, Registered Retirement Income Fund (RRIF) withdrawals after age 65, annuities, CPP pension sharing, and certain other retirement sources.
• Doesn’t qualify: Employment income, most business income, investment dividends (unless through trusts with specific structures).

Pension Income Splitting

Pension income splitting is the most common and most lucrative form of splitting. Since 2007, couples can allocate up to 50% of eligible pension income to a spouse when filing taxes. Eligible income includes private pension plans, annuities, and RRIF withdrawals after age 65.

For deeper detail, visit our guide to pension income splitting.

Tax on Split Income (TOSI)

Tax on Split Income (TOSI) rules were created to stop families from “sprinkling” income to children or relatives in lower tax brackets. TOSI generally applies to private corporation dividends and partnership income earned by minors or inactive family members.

Importantly, TOSI does not apply to legitimate pension income splitting between spouses. For a breakdown, see our article on what is tax on split income.

Who is Eligible for Income Splitting in Canada?

Eligibility depends on income source and relationship status. You must be married or in a recognized common-law partnership.

• Eligible: Retirees with pension income, RRIF withdrawals after 65, or annuities.
• Not Eligible: Common-law relationships not recognized by CRA, non-resident spouses, or under-18 dependents (except in rare cases).

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

When Should You Use Income Splitting in Canada?

Timing is everything. Income splitting is most beneficial when there’s a large income disparity between partners. But when you start matters too:

• Before retirement: Limited options, except using spousal RRSPs.
• At retirement: Consider pension income splitting immediately.
• Early withdrawals: Splitting RRSP or RRIF withdrawals can avoid OAS clawbacks and high marginal rates.

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

Income Splitting and Retirement Planning

Here’s where it gets exciting: Retirementize’s online income calculator automatically factors in income splitting. That means when you run your projections, you’ll see after-tax retirement income that reflects realistic tax savings.

Example: A couple with uneven RRIF withdrawals can see how splitting not only lowers taxes but helps them avoid OAS clawbacks (read more about the OAS clawback).

Pair this with other strategies like RRSP meltdown planning or understanding the 4% rule, and you’re building a tax-smart, stress-free retirement.

You check out another real-life detailed example of what happens when you don't split your income, versus when you do.

Common Mistakes and Pitfalls

• Assuming all income qualifies for splitting.
• Ignoring the impact of OAS and GIS clawbacks.
• Forgetting to elect income splitting annually on your tax return.
• Delaying RRIF withdrawals, missing earlier tax-saving opportunities.

FAQs on Income Splitting in Canada

• Can you split CPP income? Yes, but it’s technically called “pension sharing” and must be applied for through Service Canada.
• What’s the maximum amount? Up to 50% of eligible pension income can be split each year.
• Do common-law partners qualify? Yes, if CRA recognizes the relationship.
• Is income splitting automatic? No, you must elect it each year when filing taxes.

Conclusion

Income splitting in Canada is one of the simplest yet most powerful ways to cut your retirement tax bill and stretch your money further. From pension income splitting to CPP sharing, couples can unlock thousands in annual savings just by understanding the rules. With government benefits like OAS and GIS also in play, it’s clear that smart timing and strategy are everything.

Best of all, the Retirementize online calculator does the math for you—factoring in income splitting so you can confidently plan for a stress-free, happy retirement (read about how to achieve a happy retirement).

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