Retirement income planning in Canada offers a powerful tool that many couples overlook: pension income splitting. If you or your spouse receives eligible pension income, you may be able to allocate up to 50% of that income to the lower-earning spouse for tax purposes — without moving a single dollar between bank accounts. For couples in different tax brackets, this paper election can save thousands of dollars each year. Here is everything you need to know about pension income splitting in Canada for 2025.
Pension income splitting allows the higher-income spouse to allocate up to 50% of eligible pension income to their spouse or common-law partner on their respective tax returns. No actual money needs to change hands — it is a tax election, not a transfer of funds. The Canada Revenue Agency simply treats a portion of the pensioner's income as if it were earned by the receiving spouse.
The mechanics are straightforward. The transferring spouse reduces their taxable income by the allocated amount, while the receiving spouse includes that same amount as pension income on their return. When there is a meaningful difference in marginal tax rates between spouses — for example, one spouse in the 33% federal bracket and the other in the 20.5% bracket — shifting income downward produces real, permanent tax savings every filing year.
The election is flexible. The optimal split percentage changes year to year based on each spouse's income, so it is worth reviewing the calculation annually rather than locking in a fixed percentage.
Not all retirement income is eligible for pension income splitting, and the rules differ depending on your age.
Lifetime annuity payments from a registered pension plan (RPP) qualify regardless of the pensioner's age. This includes defined benefit pension payments from an employer-sponsored plan — the kind common among teachers, nurses, federal and provincial government employees, and unionised workers. If you receive a monthly defined benefit pension cheque, that income is eligible from the moment you begin receiving it.
A wider range of income becomes eligible once the pensioner turns 65 in the tax year:
Several common retirement income sources are excluded from pension income splitting:
One of the most significant planning opportunities in Canadian retirement tax strategy relates to RRIF withdrawals and the age 65 threshold. RRIF withdrawals only qualify for pension income splitting if the plan holder is 65 or older in the tax year.
Most Canadians convert their RRSP to a RRIF by age 71, which is the CRA deadline. However, you are permitted to convert earlier — and doing so at age 65 unlocks two valuable benefits simultaneously: pension income splitting eligibility and the pension income tax credit.
The minimum required RRIF withdrawal at age 65 is relatively small, but even withdrawing $2,000 per year is enough to claim the federal pension income tax credit, which is worth up to $300 in federal tax savings. If you then split that income with a spouse who would not otherwise qualify for the credit, they can claim it on the received amount as well — effectively doubling the credit for your household.
For couples where one spouse has a substantial RRSP and the other has little retirement savings, converting a portion to a RRIF at 65 and electing to split is a strategy worth modelling with your accountant well before that birthday arrives.
The maximum allocation is 50% of eligible pension income. Both spouses must consent to the election — it cannot be done unilaterally. In practice, the optimal split percentage is rarely a round number and is usually determined by tax software or a professional who models the combined household tax liability at various allocation percentages.
A few considerations affect the ideal split amount:
The split amount is recalculated each year on Form T1032, so there is no obligation to carry the same percentage forward from one filing to the next.
The election is made by filing Form T1032 — Joint Election to Split Pension Income — with both spouses' T1 tax returns for the year. Both spouses must sign the form, and both returns must be filed with CRA for the same tax year.
On the transferring spouse's return, the allocated amount is deducted from their pension income, reducing net income accordingly. On the receiving spouse's return, the same amount is reported as pension income. This means the receiving spouse also becomes eligible to claim the pension income tax credit on the transferred amount if they would not otherwise qualify — a credit that requires having at least $2,000 in eligible pension income.
The form must be filed on time. Late-filed elections are not accepted, and the election cannot be amended after the filing deadline for that tax year. This makes timely, accurate filing essential — not an area where a last-minute correction is easy to arrange.
One of the most valuable applications of pension income splitting is managing the OAS clawback, formally known as the OAS recovery tax. For 2025, OAS begins to be clawed back when individual net income exceeds $93,454. Above that threshold, CRA recovers 15 cents of OAS for every additional dollar of income.
If the higher-income spouse earns $103,454, they are $10,000 above the threshold and face a clawback of $1,500 — a significant hit on top of their regular tax bill. By allocating $10,000 of eligible pension income to a lower-income spouse through the T1032 election, the transferring spouse's net income drops below the clawback threshold entirely, recovering the full $1,500. In households where both spouses are above the threshold, the goal becomes minimising the total clawback across both returns rather than eliminating it on one.
The team at Swift Accounting in Calgary regularly models these scenarios for clients approaching retirement and those already receiving OAS, because the interaction between pension splitting, investment income, and the clawback threshold varies considerably from one household to another.
Pension income splitting under the Income Tax Act is separate from CPP pension sharing administered by Service Canada. With CPP pension sharing, couples who are living together can apply to share their CPP retirement pension payments — this involves an actual redistribution of CPP income between the two spouses, not merely a paper tax election.
CPP sharing is available from age 60 to 70 and can reduce CPP income for the higher-earning spouse while increasing it for the lower-earning spouse. It may be beneficial when one spouse contributed significantly more to CPP over their career. However, CPP sharing and pension income splitting serve different purposes and are calculated independently. Coordinating both strategies requires a combined analysis — doing one without considering the other can produce suboptimal results.
Pension income splitting looks simple on the surface, but the interplay with OAS clawback thresholds, provincial tax rates, pension income credits, and CPP sharing makes the optimal election highly individual. A qualified accountant will model the split across both returns, account for all income sources, and identify the percentage that minimises your combined household tax bill — not just the transferring spouse's bill in isolation.
If you are approaching retirement or already receiving pension income, now is the time to review your strategy. Contact Swift Accounting Calgary to book a retirement tax planning consultation and find out how much pension income splitting could save your household in 2025.
Yes. The Income Tax Act treats common-law partners the same as legally married spouses for the purposes of pension income splitting. You and your common-law partner must both sign Form T1032 and file your T1 returns for the same tax year. The definition of common-law partner for CRA purposes requires that you have lived together in a conjugal relationship for at least 12 continuous months, or that you share a child.
It can. Increasing the receiving spouse's net income through pension income splitting may reduce their eligibility for the age amount tax credit, which begins to phase out at a net income of $44,325 for 2025. Any credit or benefit tied to net income — including the GST/HST credit and certain provincial credits — could be affected. This is another reason why the full household picture must be modelled before deciding on the split percentage.
Pension income splitting is available for the portion of the year both spouses were alive and living together. A final T1 return is filed for the deceased spouse, and a separate return is filed for the surviving spouse. The election can still be made on a pro-rated basis for the months the couple was together in the tax year. The executor of the estate and the surviving spouse both need to sign Form T1032 in this situation, and the rules can be complex enough to warrant professional assistance.
No. The election must be made when the tax return for each year is filed, before the filing deadline. You cannot go back and amend a prior-year return to add pension income splitting after the deadline for that year has passed. If you missed the election in a prior year, that opportunity is lost. This underscores the importance of reviewing your retirement tax situation with an accountant each year before the April 30 filing deadline rather than after.
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