Key takeaways:
- Income splitting in Canada shifts income to a lower-earning spouse, reducing a couple's combined tax burden.
- In Canada, directly transferring employment income between spouses is not allowed, but there are indirect strategies that are legal.
- Spousal RRSP contributions generate immediate deductions for the higher income spouse, while future withdrawals are taxed at the lower income spouse's rate.
- Up to 50% of eligible retirement income — pensions, RRIFs, RRSPs — can be allocated to a lower-earning spouse.
- CPP, QPP and OAS payments do not qualify for pension income splitting in Canada — a critical planning distinction.
Income splitting in Canada
There are several tax benefits to being part of either a married or common-law couple. These include taking advantage of the spousal tax credit, and pooling your charitable donations and medical expenses to receive a larger tax credit.
Another key advantage of having a domestic partner is income tax splitting. Its goal is to spread the income of the higher-earning spouse to the lower-earning spouse, to reduce their overall tax obligations (although if both spouses earn roughly the same income, it’s not worthwhile).
For working couples, there are several strategies that can help you to indirectly split your income to lower your taxes. It is important to note that directly shifting working income from one spouse to the other is not allowed in Canada.
For retired couples, retirement income splitting is allowed for certain sources of income.
Let’s take a look at ways you could shift income around to lower your overall tax bill.
Income splitting through spousal RRSP contributions
With this type of RRSP, Canadian spousal income splitting rules allow for the higher-earning spouse to contribute to their lower-earning spouse’s RRSP. There are both immediate and long-term benefits to this strategy:
- A spousal RRSP’s contribution limit is based on the income of the higher-earning spouse. This allows for a larger amount of retirement savings than otherwise.
- The higher-income spouse receives a tax deduction each year they contribute to the spousal RRSP.
- When the money is withdrawn, it is at the lower-income spouse’s tax rate, making for significant tax savings.
- The higher-earning spouse can continue to contribute to a spousal RRSP and reduce their taxable income, even after they turn 71, if their spouse is younger.
The money must stay in the account for at least two calendar years after the contribution is made, otherwise there are tax implications for the higher-earning spouse. You can find more details at the Government of Canada’s RRSP webpage.
Max out your TFSAs
Tax-free savings accounts have more flexible rules when it comes to indirect income tax splitting. The lower-income spouse can use money from a joint account to invest in their TFSA.
This allows both spouses to maximize the tax-free growth that TFSAs provide, without any negative tax implications.
Income tax splitting for retirees
Income splitting in retirement can be extremely tax-efficient, especially if one spouse has significantly more retirement income than the other.
It involves the higher-earning spouse sharing their retirement income with the lower-earning spouse, for tax purposes. This strategy typically brings about an overall reduction in tax owed by the couple, given that it brings the high-earning spouse into a lower tax bracket. If both spouses have similar retirement incomes, there would be no advantage.
Here’s how it works:
- To be eligible for retirement income tax splitting, both spouses must be living together, in Canada (although there are some exceptions).
- Eligible income includes a company pension plan, registered retirement income funds (RRIFs), registered retirement savings plans (RRSPs) and life annuities.
- Income from the Canada Pension Plan, Quebec Pension Plan and Old Age Security are not eligible for Canadian income tax splitting.
- You can transfer as much as 50% of your eligible retirement income to your spouse.
- This could bring the higher earner down to a much lower tax bracket.
- Some age restrictions apply.
- Pension income splitting can allow for the use of the pension income amount (a tax credit of $2,000) for both spouses.
Both spouses need to complete and sign Form T1032 Joint Election to Split Pension Income to apply for Canadian retirement income splitting. The forms should contain identical information and then be attached to both spouse’s tax returns.
Income splitting in Canada FAQs
What is income splitting and which couples can benefit most?
Income splitting in Canada is a tax planning strategy that shifts income from a higher-earning spouse to a lower-earning one. This can reduce the couple's collective tax liability by taking advantage of lower marginal rates.
It works best when there is a significant difference between their incomes. Couples with roughly equivalent earnings will find little or no benefit in pursuing it.
Can a higher-earning spouse simply transfer a portion of their employment income to their partner?
No. The CRA prohibits the direct transfer of employment income between spouses. However, there are several indirect strategies available — including spousal RRSP contributions and TFSA optimization — that can achieve a comparable income splitting outcome without crossing the line with the CRA.
How does a spousal RRSP facilitate income splitting, and what are its primary advantages?
A spousal RRSP allows the higher-earning spouse to contribute to a plan registered in the lower-earning spouse's name, up to the contributor's own deduction limit.
There are three main benefits: the contributor claims the annual tax deduction; the couple can accumulate a larger combined retirement pool; and when funds are eventually withdrawn, they are taxed at the lower-income spouse's marginal rate. This can potentially yield substantial long-term tax saving. Notably, contributions can continue even after the contributor turns 71, provided their spouse is younger.
How can a couple use TFSAs as an income splitting strategy?
While TFSAs do not offer a contribution deduction, they do permit meaningful indirect income splitting. The lower-income spouse can invest funds drawn from a joint account into their own TFSA, allowing both partners to benefit from tax-free growth. Critically, this approach carries no adverse attribution implications, unlike some other spousal investment arrangements .
What income sources qualify for pension income splitting in retirement?
Eligible sources include company pension plans, registered retirement income funds (RRIFs), RRSPs, and life annuities. It is important to note that Canada Pension Plan (CPP), Quebec Pension Plan (QPP) and Old Age Security (OAS) payments do not qualify for income splitting. Both spouses must be residing together in Canada, subject to limited exceptions.
How much can be allocated to a lower-earning spouse for income splitting in Canada?
Up to 50% of eligible retirement income may be transferred to a spouse for tax purposes. This can bring the higher-earning spouse into a materially lower bracket, reducing the couple's combined tax exposure. It may also enable both spouses to claim the pension income amount, a tax credit valued at $2,000 each.
What steps are required to formally implement pension income splitting?
Both spouses must complete and sign CRA Form T1032 — the Joint Election to Split Pension Income — and file it with their annual returns.
Given the range of eligibility conditions and age-related restrictions involved, engaging a qualified financial advisor is strongly recommended to ensure the strategy is structured correctly and to maximum effect .
How to get started with income tax splitting options
As with any issues related to tax, you should talk to your accountant or tax specialist to discuss the most tax-efficient strategies for your particular situation.
Your IG advisor can also give you advice on how income tax splitting strategies can benefit your overall financial plan. Call your IG advisor today to book a meeting: if you don’t have an IG advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Advisor.
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