While many rules prevent families from income splitting, two strategies remain available for couples in retirement: pension income splitting and spousal RRSPs. Pension income splitting allows you to allocate up to half of your eligible pension income to your spouse or partner. The main benefit is transferring income from the higher-earning partner to the lower-earning partner, potentially reducing your family's overall tax liability. Additional advantages include doubling the pension credit, preserving the age amount, and reducing the OAS clawback.
Eligible Pension Income
You can split any pension income that qualifies for the $2,000 federal pension credit, including annuity-type payments from a pension plan (any age) and RRIF or LIF withdrawals once you reach age 65. For Quebec tax purposes, you must be at least 65. OAS and CPP/QPP payments are excluded, though you can share CPP/QPP under separate rules.
How Pension Splitting Works
Pension splitting is a notional allocation: your actual payment stays the same, but up to 50% is reported on your spouse's tax return. Both must jointly elect annually using CRA Form T1032. Tax withheld at source is also allocated proportionally. Since no funds are transferred, you don't need to contact your pension provider. Attribution rules do not apply to notionally split income.
Benefits of Pension Splitting
- Allows your spouse to claim the pension credit for up to $2,000 of eligible income.
- Helps preserve age amount and other income-tested credits.
- Reduces or eliminates OAS clawback (15% on income over $95,323 in 2026).
- Does not affect benefits based on combined income, such as the Canada Groceries and Essentials Benefit.
Spousal RRSPs
Spousal RRSPs allow income splitting at any age, which is especially useful before age 65. Contributions to a spousal RRSP are taxed in the hands of the spouse upon withdrawal, except for contributions made in the current or prior two years. Minimum withdrawals from a spousal RRIF are exempt from attribution. Unlike pension splitting's 50% cap, spousal RRSPs enable 100% of income to be taxed to the spouse.
Example
Aleena, age 65, splits her RRIF withdrawals with Toby, age 62. The RRIF income qualifies for pension splitting (up to 50%), but Toby can't claim the $2,000 credit until age 65. If Aleena had a defined benefit pension, both could claim the credit.
You can contribute to a spousal RRSP even after age 71 if your spouse is under 72, provided you have contribution room.
Pension splitting and spousal RRSPs are robust tools to reduce taxes on retirement income. Couples should assess their circumstances annually, considering age, income levels, and retirement needs.
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