Pension income splitting is one of the most powerful — and underused — tax planning tools available to retired Canadians. It allows you to allocate up to 50% of eligible pension income to your spouse or common-law partner, reducing the higher earner's taxable income and shifting it to the lower earner. The result can be thousands of dollars in annual tax savings with no change in actual cash flow.
Pension income splitting is a paper election made on your tax returns. No money actually changes hands. The higher-income spouse (the "pensioner") elects to transfer up to 50% of their eligible pension income to the lower-income spouse (the "pension transferee"). Both spouses report the split amounts on their own returns and pay tax accordingly.
The election is made jointly on Form T1032 (Joint Election to Split Pension Income), filed with both returns. You can choose any percentage from 0% to 50% — and the optimal split percentage varies year by year based on each spouse's income.
Eligibility depends on the type of income and your age:
The following income qualifies for splitting:
Eligible income is more restricted — primarily:
Importantly, CPP (Canada Pension Plan) and OAS (Old Age Security) are NOT eligible for the pension income splitting election — they cannot be split. However, CPP has its own credit splitting mechanism for divorced or separated couples.
One underused strategy: converting a portion of an RRSP to a RRIF before age 65 is not required, but after age 65, RRIF withdrawals become eligible pension income for splitting purposes. For a retiring couple where one spouse has a large RRSP, beginning RRIF withdrawals at 65 (rather than waiting until the mandatory age 71 conversion) creates eligible pension income that can be split immediately.
This also enables both spouses to claim the pension income tax credit ($2,000 federal credit available to those receiving eligible pension income), worth approximately $300 in federal tax savings per spouse annually.
Both the pensioner and the pension transferee can claim the federal pension income tax credit on up to $2,000 of eligible pension income each. If pension splitting shifts $2,000+ of eligible income to the lower-income spouse, they can claim this credit even if they had no eligible pension income originally. The combined saving from two credits is approximately $600+ annually, in addition to the rate-differential savings from income splitting.
Old Age Security benefits are subject to a clawback (the OAS Recovery Tax) when income exceeds the threshold — in 2025, approximately $90,997. For every $1 of income above the threshold, OAS is reduced by 15 cents, completely eliminating OAS at approximately $148,000 of income.
Pension income splitting can reduce the higher-income spouse's net income below the OAS clawback threshold, preserving some or all of their OAS benefits. A spouse with $110,000 in income could split $20,000 to the lower-income spouse, bringing their income below $91,000 and eliminating the clawback entirely — recovering up to $8,500+ in annual OAS.
For lower-income spouses who receive GIS, be cautious with pension income splitting. Increasing the lower-income spouse's income through splitting may reduce their GIS — a benefit that phases out at relatively low income levels. Model the net impact on the combined household before electing to split.
The optimal split percentage is not always 50%. You want to equalize marginal tax rates between spouses — but only up to the point where further equalization doesn't improve the combined tax position. Other factors:
Run the numbers with tax software or a financial advisor each year to determine the optimal split for your situation. The optimal percentage often changes year to year.
Pension splitting and spousal RRSP are complementary strategies targeting different phases:
Both should be part of a comprehensive retirement income plan.
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