Pension Income Splitting in Canada
Pension income splitting lets couples allocate up to 50% of eligible pension income to a spouse or common-law partner to reduce overall household tax. If you receive pension or RRIF income, pension income splitting can often lower your combined tax bill — and the Retirementize online income calculator models this automatically so you can see the real after-tax impact.
What exactly is pension income splitting?
Pension income splitting is an election on your tax return that shifts part of eligible pension income from the receiving spouse (the transferring spouse) to the receiving spouse (the recipient) so the household benefits from lower marginal tax rates. It’s a joint election reported using CRA forms (see Form T1032).
Which pension income is eligible?
Eligible pension income typically includes amount from registered pension plans, certain annuities, and RRIF withdrawals (rules differ by age — for example RRIF income may be eligible when you are 65+). Payments from a workplace pension or a private pension plan generally qualify. Full CRA details list eligible and ineligible types.
How much can you split?
You can allocate up to 50% of eligible pension income to your spouse each tax year. Only one joint election can be made per tax year, and both spouses must sign the election on the return. The amount allocated is deducted from the transferring spouse’s income and included in the recipient’s income.
Simple example that shows the math (nice and friendly)
Meet Pat and Jamie. Pat receives $40,000/year in eligible pension income; Jamie has $15,000/year other income. If Pat allocates $20,000 (50%) of pension to Jamie, the household incomes become:
- Pat: $20,000
- Jamie: $35,000
Because Canada’s tax system is progressive, the tax saved by dropping Pat into a lower bracket and moving income to Jamie typically reduces total household tax. Use Retirementize to plug numbers and see exact savings instantly.
How to elect pension income splitting
Couples must jointly elect splitting when filing taxes by completing the required lines on the T1 return and Form T1032 (Joint Election to Split Pension Income). The election is for the tax year and must be completed each year you choose to split.
Interaction with other credits & benefits
Pension splitting can affect eligibility thresholds for Old Age Security (OAS) clawbacks and other income-tested benefits — which is why it pays to model scenarios before taking action. In many cases splitting helps avoid OAS clawback; in others it could push a spouse into a bracket that reduces certain credits. Use the Retirementize calculator to test outcomes, including OAS interactions like OAS clawback.
Common mistakes to avoid
- Assuming all retirement income qualifies — not all income is eligible.
- Forgetting to file the joint election each year.
- Not modelling the effect on income-tested benefits (OAS/GIS).
CPP pension sharing vs pension income splitting
CPP has a separate pension sharing mechanism (apply through Service Canada) that can also reduce household tax by reallocating CPP retirement pension amounts between spouses. Pension sharing through CPP is applied for via Service Canada and is separate from CRA’s pension income splitting election for other pension sources.
Conclusion – when pension income splitting is a winner
If you have uneven retirement incomes, pension income splitting is often one of the easiest and most powerful tax tools available to married or common-law couples. It’s legal, simple to elect, and modeled automatically in the Retirementize calculator so you can make evidence-based choices.