While everyone understands that taxes are a vital part of keeping necessities like infrastructure and public services running, a hefty tax bill can put a real strain on your personal finances. This is especially true if you're not prepared.
Many married couples or common-law partners choose to alleviate some of that tax burden through a practice called income splitting. The goal of income splitting is to reduce a household's overall tax bracket. However, not all income is authorized to be split in this way — understanding the rules, eligible income types, and available strategies can help you make more informed decisions at tax time.
What is income splitting in Canada?
Income splitting is a tax strategy where the higher-earning partner in a couple transfers a portion of their eligible income to the lower-earning partner, so both are taxed at lower marginal rates. In Canada, couples can split up to 50% of eligible pension income with a spouse or common-law partner, reducing the household's overall tax bill.
The most common form of income splitting takes place during retirement.
No matter your age, planning for retirement early can make income splitting easier down the road. The idea is simple: the higher-earning partner spreads savings across accounts instead of leaving it all in one place, where it can be taxed more heavily. If you want to map this out for your own situation, it's worth speaking to a financial advisor.
Here's an example:
The scenario: Isabella earns $150,000 and Osman earns $70,000, and both are in their late 30s
The strategy: instead of placing all her savings into her Registered Retirement Savings Plan (RRSP), Isabella contributes part of it to a spousal RRSP, so both spouses' RRSPs will be roughly equal by retirement
The benefit: drawing income from two smaller RRSPs results in a lower combined tax burden than withdrawing from one large one
While spousal income splitting in Canada is usually discussed within the context of retirement planning, there are other approaches too. "There's income splitting before retirement, but that's a much more complicated scenario," a financial advisor says. "One strategy would be to implement something called a spousal loan, where one spouse lends another spouse money, and that spouse uses the money to earn investment income."
How does income splitting work?
Canada uses a graduated (or progressive) tax system, meaning the more you earn, the higher the tax rate on your additional income. Each portion of your income falls into a specific tax bracket, and the rate increases as your income rises.
Income splitting works by shifting a portion of the higher earner's income to the lower-earning spouse or common-law partner. Because the transferred income is then taxed at the lower earner's marginal rate, the household's combined tax bill can decrease.
This concept applies across different life stages, though the available strategies vary:
During your working years: options may include spousal RRSPs, prescribed rate loans, or splitting Canada Pension Plan (CPP) contributions with a spouse
In retirement: pension income splitting (up to 50% of eligible pension income) and sharing your CPP/QPP retirement pension with your spouse.
Not all income-splitting strategies are available to everyone, and the tax savings depend on the difference between each partner's marginal tax rates. The wider the gap, the greater the potential benefit.
Income splitting rules in Canada
The Canada Revenue Agency (CRA) has specific rules governing how income can be shared between spouses or common-law partners. Understanding these rules is important, as improperly shifting income can trigger what are known as attribution rules.
Attribution rules
Attribution rules are designed to prevent taxpayers from simply transferring assets or income to a lower-earning spouse to reduce taxes. Under these rules, if you give or lend money to your spouse (or a minor child) and they use it to earn investment income, that income is generally "attributed" back to you — meaning you are still taxed on it.
For example, if you gift $50,000 to your spouse and they invest it, any interest or dividends earned would be taxed in your hands, not theirs. Capital gains, by contrast, are generally attributed back on transfers to a spouse — but not on transfers to a minor child, where the gains are taxed in the child’s own hands. (This makes gifting growth investments to a minor a legitimate way to split future capital gains.)
Prescribed rate loan exception
One way to work within the attribution rules is through a prescribed rate loan. In this arrangement, the higher-earning spouse lends money to the lower-earning spouse at the CRA's prescribed interest rate. As long as the borrowing spouse pays the interest by January 30 of the following year, the attribution rules do not apply.
The prescribed interest rate is set quarterly by the CRA and tends to be lower than commercial lending rates. This can make it a useful strategy when the rate is low.
Tax on split income (TOSI) for business owners
Business owners should be aware of the Tax on Split Income (TOSI) rules. TOSI was expanded in 2018 to limit income-splitting strategies that involve paying dividends or salaries to family members who do not meaningfully contribute to the business. Income subject to TOSI is taxed at the highest marginal rate, regardless of the recipient's actual income level.
There are exceptions — for instance, if the family member is actively involved in the business or is over 24 and owns a significant portion of it. However, TOSI can be complex, and the rules vary depending on the type of business and the family member's role.
Types of income eligible for splitting
Not every form of income — or every type of taxpayer — is eligible for income splitting.
If you and your common-law partner or spouse want to split income, the transferring spouse — the one sharing their pension — generally needs to be at least 65 years of age for most types of income to qualify (such as RRIF withdrawals and RRSP annuity payments). If the transferring spouse is under 65, eligible income is limited to registered pension plan payments, or specific annuities and benefits received because of the passing of a spouse.
To be eligible, both partners must be residents of Canada on December 31 of the tax year, and must not have been living separate and apart because of a breakdown in the marriage or common-law relationship for a continuous period of 90 days or more that includes December 31. Partners who live apart for medical, educational, or business reasons — rather than a relationship breakdown — are still eligible.
The following types of income are eligible for splitting:
Registered Retirement Income Fund (RRIF) income: withdrawals from a RRIF, except amounts on line 11500 transferred to an RRSP, another RRIF, or an annuity
RRSP income: payments from an RRSP annuity
Life annuity income: payments from a registered pension plan
The following types of income are not eligible:
Old Age Security (OAS) payments: government benefits that cannot be split
CPP or Quebec Pension Plan (QPP) income: these have a separate sharing process
United States individual retirement account income: not eligible under Canadian rules
You can find more detailed information about eligibility on the CRA's website.
Income splitting strategies
There are several strategies available for splitting income with a spouse or common-law partner, depending on your age and financial situation.
Pension income splitting
Pension income splitting is the most common method used by retirees. If you're 65 or older, you can allocate up to 50% of your eligible pension income to your spouse or common-law partner on your annual tax return. This is done by filing form T1032 with the CRA each year.
Eligible pension income for those 65 and older includes RRIF withdrawals, RRSP annuity payments, and life annuity payments from a registered pension plan.
Spousal RRSP contributions
A spousal RRSP allows the higher-earning partner to contribute to an RRSP in the lower-earning partner's name. The contributing spouse receives the tax deduction, but the funds belong to the receiving spouse.
When the receiving spouse eventually withdraws the money — typically in retirement — it's taxed at their lower marginal rate. To avoid attribution, the funds generally need to remain in the spousal RRSP for at least 3 calendar years after the last contribution.
CPP/QPP sharing
If both spouses are living together and at least one of you is receiving — or has applied for — a CPP or QPP retirement pension, you can apply to share it. Both partners are generally 60 or older (CPP’s earliest start age), and if only one of you ever contributed, that single pension can still be shared.The amount shared is based on the period of time they lived together relative to their total contributory period.
This is different from pension income splitting — it's a separate application made directly to Service Canada or Retraite Québec.
Prescribed rate loans
A prescribed rate loan involves the higher-earning spouse lending money to the lower-earning spouse at the CRA's prescribed interest rate. The borrowing spouse invests the funds, and as long as the interest is paid on time each year, the investment income is taxed at the lower earner's rate.
This strategy can be used at any age and is not limited to retirement.
Advantages of income splitting
Pension income splitting can be helpful for couples who have different income levels, particularly for high-income earners who would otherwise be in much higher tax brackets. This is especially relevant during retirement, when income from investment accounts may push one partner into a high tax bracket.
"You'd want an income split if you're in retirement and you [and your spouse] end up in different tax brackets," a financial advisor says. "Income splitting will let you reduce your overall tax bill."
There's one case where you probably won't need to bother with income splitting — if you and your partner land in the same tax bracket in retirement with similar RRSPs or pensions.
There is another lesser-known benefit of income splitting: the federal government allows every retiree with an eligible pension amount a tax credit of $2,000, known as the Pension Income Amount. This means that the first $2,000 of your annual pension income is essentially tax-free if you're in the first tax bracket.
Splitting your pension also lets a spouse who doesn't currently receive a pension claim the tax credit too. That's another reason to consider it — you could both end up claiming the $2,000 in pension tax credits."
Common mistakes to avoid
Forgetting to file form T1032
Pension income splitting is not automatic. Both you and your spouse or common-law partner must complete and file form T1032 each year you want to split pension income. If you forget, you won't be able to claim the split for that tax year.
Overlooking the impact on government benefits
Transferring income to your spouse can affect their eligibility for income-tested government benefits, such as OAS or the Guaranteed Income Supplement (GIS). If the transfer pushes the receiving spouse's net income above certain thresholds, they could see a reduction — or clawback — in these benefits.
It's worth looking at both partners' full financial picture before deciding how much income to split.
Ignoring attribution rules
The CRA's attribution rules can apply when income or assets are transferred between spouses outside of approved channels. If you gift money to your spouse for investing purposes without using a proper prescribed rate loan, the investment income may be attributed back to you for tax purposes — effectively negating any benefit.
Not starting early enough
Many couples wait until retirement to think about income splitting, but planning ahead can make a meaningful difference. Contributing to a spousal RRSP during your working years helps balance retirement income between partners over time. The earlier you begin, the more flexibility you may have when it's time to start drawing on those savings.
How to file for income splitting
Income splitting is an electable action that you opt in to every year when you file your taxes. To do so, both you and your spouse or partner must complete and file the CRA's form T1032, Joint Election to Split Pension Income.
Form T1032 can be complex, so many people choose to get help from an accountant or use tax preparation software. A new form T1032 must be filed for every year you choose to split income.
Start planning for income splitting
Income splitting can be a practical way for couples to manage their household tax burden, especially when there's a notable difference in income between partners. Whether you're years away from retirement or already there, understanding the available strategies and rules can help you make more informed decisions.
Consider speaking with a qualified tax professional or financial advisor who can review your specific situation. Every household's circumstances are different, and the right approach depends on factors like your income levels, the types of retirement accounts you hold, and your long-term financial goals.
