Splitting Pension Income in Retirement: How It Works & Why It Can Save You Money

Learn how pension income splitting works in Canada, who qualifies, and how retirees can reduce taxes by sharing up to 50% of eligible pension income. Simple steps, examples, and CRA rules explained

11/21/20252 min read

What Is Pension Income Splitting?

Pension income splitting is a tax strategy for retired couples that allows one spouse to transfer up to 50% of eligible pension income to the other spouse when filing taxes.

This can lower your combined tax bill if:

One spouse has higher pension income, and
The other spouse is in a lower tax bracket.

In simple terms:
➡️ You move income from the higher-earning spouse to the lower-earning spouse to reduce your overall taxes.

Who Can Split Pension Income?

You are eligible if:

You are married or common-law partners,
You live together at the end of the tax year,
One spouse receives eligible pension income (e.g., RRIF withdrawals after age 65, lifetime annuity payments, private pensions).

Eligible Pension Income Includes:

Registered pension plan (RPP) income
Life annuity payments
RRIF withdrawals (age 65+)
Deferred profit-sharing plan (DPSP) annuities

Not Eligible:

Old Age Security (OAS)
Canada Pension Plan (CPP/QPP) – but CPP can be shared using a separate program
RRSP withdrawals
GIS benefits

Why Pension Income Splitting Helps Save Money

1. Reduces Income Tax

When one spouse earns significantly more, they may be pushed into a higher tax bracket. By shifting income to the lower-income spouse, you reduce the total tax for the couple.

2. Prevents OAS Clawback

Higher-income retirees may lose part of their Old Age Security when their income exceeds the clawback threshold.

Splitting pension income can lower taxable income and help keep full OAS benefits.

3. Boosts Eligibility for Credits

Income splitting can increase access to:

Age Amount
Pension Income Credit
Medical Expense Credit
GST/HST Credit

A lower net income often means more tax credits.

How to Split Pension Income (Simple Steps)

Decide how much to split (up to 50%).
Complete the form T1032 – Joint Election to Split Pension Income.
Both spouses must sign the form.
Enter the amounts on each tax return.
File the form with CRA when submitting taxes.

Your tax software or accountant can calculate the optimal amount automatically.

Example: How Much Can You Save?

John: $60,000 in pension income
Maria: $10,000 in income

John can transfer $25,000 (50%).
Now each spouse reports around $35,000 and $35,000.

✔ Both stay in lower tax brackets
✔ They avoid OAS clawback
✔ They qualify for more credits

Total tax savings: $1,500 – $3,000+ depending on province

Common Mistakes to Avoid

❌ Thinking OAS or CPP can be split under this rule
❌ Forgetting to sign the T1032
❌ Splitting income that results in clawback of benefits
❌ Not reviewing the split amount every year

Is Pension Income Splitting Right for You?

It is almost always beneficial when:

One spouse has much higher pension income
You want to reduce overall taxes
You want to avoid OAS clawback
You want to maximize tax credits

If your incomes are already similar, splitting may not change your taxes — but it rarely hurts.

Final Takeaway

Pension income splitting is one of the most effective tax-saving strategies for Canadian retirees. It’s simple, legal, and can reduce your tax bill every year in retirement.

If you want help calculating the best split or filing the T1032 correctly, TikiTax.ca can walk you through it.