If you or your spouse receives a pension, there’s a powerful — and often underused — tax strategy available: pension income splitting. Used correctly, it can significantly reduce your combined tax bill.
What Is Pension Income Splitting?
Eligible Canadian couples can elect to split up to 50% of eligible pension income with their spouse or common-law partner, shifting it from a higher bracket to a lower one.
What Income Is Eligible?
- At any age: Annuity payments from a Registered Pension Plan (RPP)
- Age 65+: RRIF withdrawals, LIF payments, RRSP annuities
CPP and OAS are not eligible under this provision.
The Tax Benefits
- Lower marginal rates — Income taxed at the lower-earning spouse’s rate
- OAS clawback protection — Can bring the higher earner below the $95,353 threshold
- Pension income credit — Receiving spouse may qualify for the $2,000 federal pension credit
- Age credit preservation — Lower net income protects the age amount for those 65+
How to Make the Election
Complete Form T1032 – Joint Election to Split Pension Income. Both spouses sign and file it with their returns each year. The election is not automatic.
Why Filing Together With a CPA Matters
The optimal split percentage varies each year based on income, credits, and provincial rates. A CPA models different amounts simultaneously to find the combination that minimizes your household’s total tax bill.
Pension splitting is one of the most valuable strategies for Canadian retirees. CMP Accounting can run the numbers for your household.