Income Splitting in Retirement: What Ontario Couples Need to Know
One of Canada's most generous tax planning opportunities and one of the most underused
Canada's tax system is built around the individual. Each person pays tax on their own income, at their own marginal rate. For couples where one spouse earned significantly more than the other throughout their careers, this creates a major retirement tax problem: one partner may face high marginal rates on their income while the other has little income and pays minimal tax.
Income splitting is a set of strategies designed to address exactly this imbalance. Legally shifting income from the higher-earning spouse to the lower-earning one, reducing the household's combined tax bill. For Ontario couples with $1M+ in retirement assets, income splitting is one of the most powerful and accessible tax planning tools available.
This article explains the key income splitting strategies available to retirees, how each works in practice, and the common pitfalls to avoid.
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Why Income Splitting Matters: The Tax Math
Ontario's combined federal and provincial marginal tax rates create a wide range between the lowest and highest brackets. In 2025, income below approximately $57,000 is taxed at roughly 20–24%, while income above $105,000 is taxed at 34%+, and income above $253,000 at nearly 54%.
For a couple where one spouse has $250,000 of retirement income and the other has $50,000, the tax picture is very different from a couple who each earn $150,000 — even though the total income is the same $300,000. The table below illustrates this:
| Without Income Splitting | With Income Splitting | |
|---|---|---|
| Spouse A income | $250,000 | $150,000 |
| Spouse B income | $50,000 | $150,000 |
| Combined tax (approx.) | ~$97,660 | ~$62,888 |
| Annual tax saving | — | ~$13,068/year |
* Approximate Ontario combined federal/provincial tax. Actual amounts will vary based on income composition and available credits.
In this example, income splitting saves approximately $13,068 annually or $261,360 over a 20-year retirement. The actual saving in your situation depends on the income gap between spouses and the marginal rates involved. The benefits of splitting grows the larger the disparity in taxable income between the spouses and when one spouse is in a significantly lower income tax bracket.
Strategy 1: Pension Income Splitting
Pension income splitting is the most widely used and simplest income splitting mechanism available to Canadian retirees. Under this rule, you can allocate up to 50% of your eligible pension income to your spouse or common-law partner on your tax return.
Eligible pension income includes:
RRIF withdrawals (after age 65)
Annuity payments from an RRSP (after age 65)
Payments from a defined benefit pension plan
Payments from most registered pension plans
Notably, CPP income is NOT eligible for pension income splitting through this mechanism (though CPP does have its own sharing rules — see below). OAS is also not eligible.
The split is elected annually on your tax return using CRA Form T1032. You do not need to physically transfer money. You simply decide each year what percentage (up to 50%) to allocate to your spouse, and CRA treats it as if that income belonged to them.
Key Advantage
Because this is an annual election, you can optimize the split percentage each year based on both spouses' income levels, available credits, and OAS clawback thresholds. In years where one spouse has unusually high income (a large capital gain, for example), you can allocate the maximum 50% to equalize. In other years, a smaller split may be more efficient.
Strategy 2: CPP Pension Sharing
CPP has its own income sharing mechanism that is separate from (and less flexible than) pension income splitting. Spouses or common-law partners can apply to share their CPP retirement benefits, with each receiving a portion of the combined entitlement based on how long they lived together during their contributory years.
CPP sharing is applied for through Service Canada (not your tax return) and is less flexible than pension income splitting. You cannot adjust it annually. It also requires both spouses to be at least 60 and both to have applied for or be receiving CPP. For these reasons, pension income splitting on RRIF income is generally a more powerful and flexible tool.
That said, for couples with a very large gap in CPP entitlements, CPP sharing can provide meaningful income equalization alongside pension income splitting.
Strategy 3: Spousal RRSP Contributions
A spousal RRSP is one of the most effective long-term income splitting strategies available. But it requires planning well before retirement. The mechanism is simple: the higher-earning spouse contributes to an RRSP registered in the lower-earning spouse's name. The contributor gets the tax deduction; the account belongs to the other spouse and will be taxed in their hands when withdrawn.
The result: retirement withdrawals from the spousal RRSP are taxed in the lower-income spouse's hands, where marginal rates are lower, rather than in the hands of the higher earner.
There is one important rule to be aware of: if the lower-income spouse withdraws from the spousal RRSP within three calendar years of the last spousal contribution, the withdrawal is attributed back to the contributing spouse for tax purposes. This attribution rule means contributions to a spousal RRSP should generally stop at least three years before the account is needed.
Strategy 4: Spousal Loans at the Prescribed Rate
For couples where the higher-earning spouse has significant non-registered investment assets, a spousal loan at the CRA's prescribed interest rate can be used to shift investment income to the lower-income spouse.
The higher-earning spouse lends money to the lower-income spouse at the CRA's prescribed rate (a low rate set quarterly). The lower-income spouse invests the funds and earns income at a higher rate. Keeping the excess income in their hands, where it is taxed at a lower rate. The lending spouse reports only the interest income received.
This strategy requires careful documentation, the interest must actually be paid annually by January 30th each year, and it works best when established when the prescribed rate is low.
Planning Note
This strategy has been significantly more attractive in periods of low prescribed rates. With rates having risen in recent years, the economics should be carefully evaluated with your advisor. The strategy is still viable when the spread between the prescribed rate and the expected return on invested funds is meaningful.
Strategy 5: Contributing to a Spouse's TFSA
While a spouse cannot contribute directly to another spouse's TFSA (each TFSA must be in the account holder's name and is subject to that person's contribution room), a higher-income spouse can gift funds to a lower-income spouse specifically for TFSA contribution purposes.
Unlike most inter-spousal transfers, funds given to a spouse for TFSA contributions are not subject to income attribution rules. The lower-income spouse invests the funds in their TFSA, and all growth and withdrawals are tax-free, entirely in their hands. Over time, this equalizes the tax-free wealth held between spouses, providing more flexibility in retirement.
Common Mistakes and Limitations
Income splitting strategies are powerful, but they come with rules and limitations. The most common issues we see:
Assuming all pension income is eligible for pension income splitting. CPP and OAS are not eligible under the standard splitting rules.
Ignoring the three-year attribution rule on spousal RRSP withdrawals. Withdrawing too soon negates the tax benefit.
Splitting to 50% when a smaller split would be more efficient. The optimal split percentage should be calculated, not assumed.
Not revisiting the split election each year. As income levels change, the optimal allocation changes too.
Overlooking the interaction between income splitting and OAS clawback. Shifting income to a higher-income spouse could inadvertently increase clawback exposure for that spouse.
Are You Leaving Money on the Table?
Income splitting is one of the most impactful strategies available to Ontario couples in retirement. But optimizing it requires looking at both spouses' full income picture, tax brackets, and benefit thresholds together. We model this annually for our clients to ensure they're capturing the full benefit.
Contact us today for a complimentary retirement income consultation.
Disclaimer
This publication is for informational purposes only and has been prepared from public sources which are meant to be reliable. None of the information in this should be construed as investment advice. Speak to your Investment Advisor to learn if this product is right for you. Designed Securities Ltd. (DSL) is regulated by the Canadian Investment Regulatory Organization (CIRO), and a Member of the Canadian Investor Protection Fund (www.cipf.ca). Christopher Burke is registered to advise in securities to clients residing in Ontario. The views expressed are those of the author and not necessarily those of DSL. This report does not constitute an offer or solicitation in any jurisdiction in which such offer or solicitation is not authorized or to any reliable person to whom it is unlawful to make such offer or solicitation. Content is accurate as of the date of publication, and subject to change without notice.
