When Should I Use Income Splitting in Canada?
Use income splitting when it meaningfully lowers your household tax bill, protects income-tested benefits (like OAS/GIS), or smooths retirement income to avoid spikes that push you into higher tax brackets. For pension income splitting and CPP sharing, the CRA and Service Canada rules explain when and how you can act — and the Retirementize calculator helps you test timing and amounts.
Best times to consider income splitting
- At retirement: When one spouse begins receiving eligible pension income or RRIF withdrawals, splitting up to 50% can lower combined taxes.
- When OAS clawback is a risk: If one spouse’s income approaches the OAS clawback threshold, shifting income can reduce or avoid the clawback, increasing net household income. See our OAS Clawback article for thresholds and examples.
- When one spouse has little taxable income: Splitting helps use lower marginal tax bands on the spouse with lower income.
- When you want to smooth RRIF withdrawals: Rather than one spouse taking large withdrawals some years, splitting can produce steadier taxable income for both partners.
When it’s NOT the right time
If both partners are already in similar tax brackets, splitting may offer little benefit. Also avoid splitting in a way that triggers unintended changes to benefit eligibility — use Retirementize to test the impact on OAS, GIS, and provincial credits.
Practical timing strategies
Strategy 1 — Age-staggered withdrawals: If one spouse delays CPP or RRIF withdrawals and the other starts earlier, splitting can even out incomes in the early retirement years to avoid temporary spikes.
Strategy 2 — Combine with spousal RRSPs pre-retirement: During working years, spousal RRSP contributions can “pre-split” retirement income by shifting savings to the lower-earning spouse’s future withdrawals.
Worked example — timing matters
Sam (age 66) expects $50,000 RRIF income; Lee (age 62) has $5,000. If Sam splits $25,000 to Lee, Sam’s taxable income drops and Lee’s increases — often producing tax savings and possibly keeping Sam below OAS clawback thresholds. Model this on Retirementize to see exact tax, OAS, and long-term cashflow effects.
How to evaluate whether to split now or later
- Estimate taxable incomes both with and without splitting for the next 3–5 years.
- Check OAS/GIS and provincial credit thresholds and how splitting affects them.
- Consider longevity and long-term tax brackets — splitting that helps early on might reduce lifetime taxes if it avoids high-tax years.
- Run a sensitivity test in Retirementize to quickly see “what if” scenarios.
Final thoughts
Income splitting is most powerful when used intentionally: at retirement, to avoid clawbacks, and to smooth withdrawals. It isn’t a one-time decision — you can elect splitting each tax year — so modeling and periodic review are key. Let Retirementize do the heavy lifting so your decisions are backed by numbers.