Income Splitting in Retirement: How It Works in Ontario

One of the most effective — and often underused — tax strategies available to Canadian retirees is income splitting. In Ontario, where provincial tax rates compound on top of federal rates, shifting income from a higher-earning spouse to a lower-earning one can meaningfully reduce the total tax your household pays each year. Understanding how these rules work before you retire gives you time to structure things properly.

What Is Income Splitting and Why Does It Matter?

Canada's income tax system is progressive — the more you earn, the higher the marginal rate you pay on each additional dollar. When one spouse earns significantly more than the other in retirement, a large portion of their income gets taxed at higher rates unnecessarily.

Income splitting addresses this by allowing some income to be attributed to the lower-income spouse, bringing more of the household's total income into lower tax brackets. In Ontario, the combined federal and provincial marginal rates can exceed 53% at the top — so even moving income from a mid-range bracket to a lower one can save thousands of dollars annually.

Pension Income Splitting: The Most Direct Tool

The most straightforward income splitting mechanism for retirees is the pension income splitting election under the federal Income Tax Act. If you receive eligible pension income, you can allocate up to 50% of that income to your spouse or common-law partner on your tax returns each year.

Eligible pension income includes:

• Lifetime annuity payments from a registered pension plan (RPP)
• RRIF withdrawals (once you are 65 or older)
• Annuity payments from an RRSP or DPSP (at 65+)

CPP and OAS payments are not eligible for pension income splitting — though CPP has its own separate sharing provisions. The election is made annually using CRA Form T1032, so you can adjust the split year by year based on your income situation.

A key benefit beyond the tax brackets themselves: splitting income can help the higher-income spouse avoid the OAS clawback, which begins when net income exceeds approximately $90,997 (2024 threshold, indexed annually). Reducing net income through pension splitting can preserve OAS entitlements that would otherwise be partially or fully recovered.

Spousal RRSPs: Building the Split Before Retirement

If you are still in your accumulation years, a spousal RRSP is one of the most powerful long-term income splitting tools available. You contribute to an RRSP in your spouse's name using your own contribution room. You receive the tax deduction today; your spouse owns the funds and will eventually draw them down as income.

The result: in retirement, your spouse has their own RRSP or RRIF from which they draw taxable income — income that is taxed in their hands at their (lower) marginal rate. This is especially effective when one spouse plans to stop working earlier, will have a lower pension, or will have fewer personal retirement savings.

There is an attribution rule to be aware of: if your spouse withdraws from the spousal RRSP within three calendar years of your most recent contribution, the withdrawn amount is attributed back to you. Plan withdrawals accordingly.

CPP Sharing and Other Considerations

While CPP cannot be split on your tax return the same way as pension income, CPP sharing allows couples who are both 60 or older to share the CPP credits each has earned during the years they lived together. This is a separate administrative process through Service Canada and can result in more equal CPP payment amounts between spouses.

Additionally, if one spouse has a defined benefit pension and the other does not, contributing to a spousal RRSP during working years remains one of the best ways to equalize retirement income streams — a goal that pension income splitting alone cannot fully achieve if one spouse has little to no pension income of their own.

Putting It All Together

Income splitting in retirement is rarely a single decision — it is a coordinated set of strategies that work best when planned years in advance. Spousal RRSP contributions, pension income splitting elections, CPP sharing, and OAS preservation all interact with each other, and the optimal approach depends on each couple's specific income mix, ages, and retirement timeline.

If you are within 10 years of retirement, now is the time to model out your household's projected retirement income and identify where tax savings are available. Working with a qualified financial planner ensures these strategies are applied correctly and in the right sequence.

Marc Pineault is a financial planner with Pineault Wealth Management, serving clients in London, Ontario and surrounding communities. To explore how income splitting could reduce your household's tax burden in retirement, visit pineaultwealthmanagement.com to get in touch.

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This article is for educational purposes only and does not constitute personalized financial advice. Please consult a qualified financial planner before making any financial decisions.