Ep 195- How Pension Income Splitting Works for Couples
In this episode of Your Retirement Planning Simplified, Joe Curry explains how pension income splitting works in Canada and why it can be one of the most effective tax-saving strategies for retirees. Learn how RRIF withdrawals, defined benefit pensions, and strategic retirement income planning can help couples reduce taxes, protect OAS benefits, and create more tax-efficient retirement income.
Key Takeaways
Pension income splitting can significantly reduce your household tax bill.
By shifting up to 50% of eligible pension income to a lower-income spouse, couples may save thousands annually in retirement taxes.
Age matters when it comes to eligibility.
Before age 65, only certain defined benefit pension payments qualify. After 65, RRIF withdrawals become eligible too, creating more planning opportunities.
Income splitting is a tax election, not a transfer of money.
The income stays in the same account; you simply report part of it on your spouse’s tax return for tax purposes.
Strategic RRIF withdrawals can reduce future tax problems.
Lowering future RRIF balances may help avoid higher taxes later in retirement and reduce the risk of OAS clawbacks.
Retirement tax planning works best when everything is coordinated together.
CPP timing, OAS, RRIF withdrawals, pension income, and tax brackets all interact and should be planned holistically.
Insights Worth Sharing
“Pension income splitting isn’t about moving money. It’s about reporting income more efficiently.”
“The right retirement income strategy can save you thousands in taxes every single year”
“Your retirement tax picture should be planned as a household, not in silos.”
“Lower taxes today can also mean fewer problems with OAS clawbacks tomorrow.”
“Retirement income planning isn’t just about what you make. It’s about what you keep.”
Resources
CRA Form T1032 – Joint Election to Split Pension Income
Government of Canada – Pension Income Splitting Overview
How Pension Income Splitting Can Reduce Taxes in Retirement
One of the biggest surprises many Canadians encounter in retirement is how uneven retirement income can become between spouses. One person may have a large defined benefit pension or substantial RRIF withdrawals, while the other has far less taxable income. The result? A higher household tax bill than necessary. In this episode of Your Retirement Planning Simplified, Joe Curry breaks down one of the most overlooked retirement tax planning opportunities in Canada: pension income splitting. For many retirees, this strategy can save thousands of dollars every year.
What Is Pension Income Splitting?
Pension income splitting allows couples to allocate up to 50% of eligible pension income to a spouse or common-law partner for tax purposes. Because Canada uses a progressive tax system, spreading income more evenly between spouses often lowers the overall household tax burden. Importantly, the money itself does not need to move. This is simply a tax election completed on your annual tax return using CRA Form T1032.
Why Age 65 Matters
A key detail many retirees miss is that eligibility changes at age 65. Before age 65, pension income splitting generally applies only to payments from a defined benefit pension plan. However, once you turn 65, RRIF withdrawals also become eligible. That distinction matters because many Canadians rely heavily on RRSPs and RRIFs rather than workplace pensions. Once RRIF income qualifies, retirement income planning becomes far more flexible.
The Tax Savings Can Be Significant
Joe walks through an example where one spouse receives $90,000 of retirement income while the other has very little taxable income. By splitting eligible pension and RRIF income evenly, the couple reduced their annual tax bill by approximately $6,500. That’s not a loophole or aggressive tax strategy. It’s simply using the rules available to retirees more efficiently.
Pension Splitting Can Also Help Protect OAS
Old Age Security clawbacks begin when individual net income exceeds certain thresholds. Pension income splitting may help keep one spouse below the clawback range, preserving more government benefits. It can also create opportunities for strategic RRIF withdrawals earlier in retirement while tax brackets remain lower. Over time, this may reduce future RRIF minimum withdrawals and lower the taxes paid later in life or by beneficiaries.
Retirement Planning Should Work Together
Tax planning in retirement is rarely about one single strategy. Pension income splitting works best when coordinated alongside CPP timing, RRIF withdrawals, OAS planning, and estate considerations. The goal is not simply minimizing taxes this year - it’s creating a long-term, tax-efficient retirement income plan that supports your lifestyle and protects your wealth over time.
Learn more about our retirement planning process at MatthewsAndAssociates.ca.