Income splitting—a smart strategy for retired couples

What is income splitting?

Income splitting is a tax strategy that allows eligible Canadian couples to reduce their overall tax burden by shifting income from the higher-earning spouse to the lower-earning spouse. This helps both spouses end up with similar income levels for tax purposes. It can be especially beneficial in retirement when one spouse receives a larger pension or other taxable income.

Who can use income splitting?

To qualify, you must:

• Be married or in a common-law relationship
• Be living together at the end of the tax year
• Have eligible pension income (such as income from a Defined Benefit Pension Plan, RRIF, or annuity)

How it works for Public Service Pension Plan (PSPP) members

You can allocate up to 50% of the income from a Defined Benefit pension plan to your spouse for tax purposes. This doesn’t mean transferring actual money—it's a paper transaction made when filing your annual tax return.

Example:

If you receive $40,000 annually from your PSPP pension and your spouse has little or no income, you could split up to $20,000 with them. This may lower your tax bracket and reduce the amount of tax you owe. Canada uses a progressive tax system where individuals with higher incomes pay a higher percentage of taxes—income splitting helps lower your effective tax rate.

Benefits of income splitting

• Helps smooth marginal tax rates, often lowering overall taxes for the household.
• Reduces exposure to Old Age Security (OAS) clawback (the OAS clawback begins when an individual’s annual income exceeds $93,454*).
• Encourages household-level retirement adequacy, not just individual outcomes.
• May increase eligibility for income‑tested benefits (for example, the Guaranteed Income Supplement (GIS)).
  For 2025, the Old Age Security (OAS) clawback (Recovery Tax) starts when your 2024 net income exceeds $93,454. Income thresholds change annually to adjust for inflation.

How to claim it

Income splitting is claimed on your annual tax return using Form T1032 – Joint Election to Split Pension Income. Both spouses must agree and sign the form.

Things to keep in mind

• Only eligible pension income qualifies (DB pensions, Retirement Compensation Arrangements (RCA), RRIFs after age 65, etc.).
• Canada Pension Plan (CPP) and OAS cannot be split using Form T1032, although CPP sharing is a separate option.
• Income splitting may affect tax credits and benefits, so review your full financial picture.
• Consider speaking with one of OPB’s Client Service Advisors to explore how it fits into your retirement strategy, or consult a certified tax specialist for tax‑related questions.