How pension income splitting works for couples

In retirement, one of the simplest and most effective tax planning strategies available to couples is pension income splitting. This strategy allows one spouse to allocate up to 50% of their eligible pension income to the other spouse on their tax return. The goal is to reduce overall household tax by shifting income from a higher-income spouse to one in a lower tax bracket.

Pension splitting can lead to meaningful savings—especially when it avoids Old Age Security (OAS) clawbacks, lowers marginal tax rates, or makes better use of personal tax credits.

Who Can Split Pension Income?

To qualify, both individuals must be married or in a common-law relationship at the end of the tax year and not living apart due to relationship breakdown. The income-splitting election is made jointly by filing Form T1032 with both spouses' tax returns.

Only the recipient of the pension income needs to have eligible income to split. The other spouse does not need to have pension income or even be retired.

What Types of Pension Income Qualify?

Not all retirement income is eligible for splitting. The most common sources that qualify include:

• Registered pension plan (RPP) annuities, such as defined benefit pension payments

• RRIF withdrawals, if the recipient is age 65 or older

• Annuities from registered plans, including deferred profit-sharing plans

Before age 65, the only type of pension income that qualifies is income from RPPs. Other income, such as CPP, OAS, and TFSA withdrawals, does not qualify for splitting.

How Pension Splitting Helps Lower Tax

The strategy works best when one spouse is in a higher tax bracket than the other. By allocating up to 50% of their eligible pension income to the lower-income spouse, the couple can:

• Reduce their combined federal and provincial tax payable

• Avoid or reduce the OAS clawback (which begins when net income exceeds a certain threshold)

• Access non-refundable tax credits that may be otherwise unused by the lower-income spouse

• Avoid higher marginal tax rates that might apply to the higher earner’s full income

This income allocation is reversed automatically on the next return unless it is re-elected. You can adjust the split each year depending on your financial and tax circumstances.

How to Report Pension Income Splitting

To split pension income:

1. Both spouses file their tax returns as usual

2. Complete Form T1032 (Joint Election to Split Pension Income)

3. The pensioner indicates how much income (up to 50%) they are allocating

4. The other spouse reports that amount on their return as pension income

5. Each person claims tax withheld based on their share of income

This election is reviewed annually, and you can choose to split income in some years and not in others.

When Pension Income Splitting Is Not Beneficial

Although splitting pension income often leads to tax savings, there are cases where it may increase your total tax:

• If the lower-income spouse loses eligibility for income-tested benefits, like the Guaranteed Income Supplement (GIS)

• If the higher-income spouse has no OAS and the lower-income spouse is near the clawback threshold, splitting may actually trigger the clawback

• If both spouses are already in the same tax bracket, there may be no benefit