Updated Checked by the Tax-Services.ca editorial team How we check
Income splitting in Canada means shifting taxable income from a higher earner to a spouse or partner who pays tax at a lower rate. The easiest legal version is pension income splitting: a couple can elect to move up to 50% of eligible pension income to the other partner. On our numbers, moving $35,000 in the right direction saves an Ontario couple about $2,990 a year.
So is it worth the paperwork? For a couple with a big gap in income, yes. The catch is that most other ways to split income are limited by rules that catch people out.
Pension income splitting
Eligible pension income includes life annuity payments from a pension plan, RRIF withdrawals and RRSP annuity payments. Some of these only qualify if the person who receives the pension is 65 or older, or if the payments come from a spouse’s death. Old Age Security and CPP or QPP payments can’t be split this way.
Both of you must be Canadian residents on December 31 and not separated for 90 days or more at the end of the year. Then you file Form T1032, Joint Election to Split Pension Income, with both returns by the filing deadline at tax time. You both sign the same form, and you choose a new amount each year.
The 50% is a ceiling on the pension, not a target. If one partner has $90,000 of eligible pension income, the most that can move is $45,000. You can pick any amount up to that, and the best figure is usually the one that leaves both of you at about the same taxable income.
What it saves on a real income
Take a couple in Ontario. One partner has $90,000 of eligible pension income, the other has $20,000. Using our tax maths for Ontario with the basic personal amount only, they pay about $19,313 in combined federal and Ontario tax. Move $35,000 across and both sit at $55,000, and the combined bill falls to about $16,327. That’s $2,986 less.
You can check your own case in the income tax calculator, then compare tax on each side with the marginal tax rate calculator. The gain comes from the gap between the two rates on the next dollar. If both of you are in the same bracket already, splitting does almost nothing.
It doesn’t stop at tax. The CRA says splitting affects credits based on your own income, such as the age amount, the spouse amount and the OAS repayment. It doesn’t affect credits that use joint income, such as the GST/HST credit. So the answer can go the wrong way for someone near an OAS clawback, and the calculator won’t show that.
How do you set it up, step by step?
- Work out each partner’s income for the year, and which part of it is eligible pension income.
- Try a few amounts, up to half of the eligible pension, and see where the combined tax is lowest.
- Fill in T1032 together and both sign it.
- File it with both returns. Each person’s return then shows the moved amount.
Nothing forces you to repeat last year’s choice. Some couples change the figure every year as their incomes drift, and some skip a year when it makes no difference.
Spousal RRSPs
A spousal RRSP is the older tool. You contribute and claim the deduction from your own room, but the account belongs to your spouse. When they take money out later, it’s taxed in their hands. The catch is a three-year rule: if you contributed to any of their RRSPs in the year of the withdrawal or in either of the two years before, some or all of the withdrawal is taxed to you instead. The CRA uses Form T2205 for that.
So the plan only works if you leave it alone long enough. Test the deduction side in the RRSP calculator and the retirement side with the retirement income tax calculator.
Income sprinkling in a family business
Paying dividends to a spouse or adult child who doesn’t work in the business is the case people ask about most, and it’s where the rules are tightest. The tax on split income (TOSI) reaches adults who receive income from a related business, including dividends from private companies. It’s calculated on Form T1206, and the income is left out only if it’s an excluded amount. The CRA’s exceptions include a reasonable return based on what the person put in and did, and, for people 25 and over, excluded shares.
Whether a particular payment passes is a question of facts. We’re not going to guess. If a family company is in play, this is the one place we’d talk to an accountant before paying anyone.
Mistakes and limits
Splitting on paper isn’t the same as splitting in real life. The election moves taxable income, not money. No signed T1032 on both returns, no split. And 50% is the ceiling.
Our figures leave out the pension amount, the age amount and any clawbacks, and use one year of federal and Ontario rates. We haven’t covered loans to a spouse or family trusts, because we couldn’t confirm the current rules on a CRA page. If those are your topic, read the CRA source first.
How we checked the figures
The pension splitting rules, the T1032 form and the credit effects are from the CRA‘s pages on splitting your pension income. The spousal RRSP three-year rule and Form T2205 are from the CRA’s page on contributing to a spouse’s RRSP. The TOSI description is from the CRA’s guidance on the split income rules for adults. The tax figures come from our calculators, using 2026 federal and Ontario rates.
Frequently asked questions
How much pension income can I split?
Up to 50% of eligible pension income, through a joint election with your spouse or common-law partner on Form T1032.
Can I split CPP or OAS?
Not under pension splitting. The CRA lists Old Age Security and CPP or QPP payments as not eligible.
What is the three-year rule for spousal RRSPs?
If you contributed to a spouse's RRSP in the year they withdraw or in either of the two years before, some of the withdrawal may be taxed to you. The CRA uses Form T2205.
What is TOSI?
Tax on split income. It applies to certain people who get split income, such as dividends from private companies, unless the income is an excluded amount, for example a reasonable return or excluded shares.
Does splitting change my GST/HST credit?
No. The CRA says pension splitting doesn't affect credits based on joint income, such as the GST/HST credit.
- How Canadian income tax works: brackets and credits
How federal and provincial Canadian income tax stack up, what marginal and average rates mean, and how credits and deductions change your bill