Income splitting tips for retirees

By Michelle Connolly | June 2, 2016 | Last updated on September 21, 2023
4 min read

We’ve now learned how recent tax changes will affect the Zhangs, a family of four where both parents are employees, as well as the effects on the Gonzales family, which consists of an incorporated doctor, a stay-at-home spouse, and three adult children.

In this final installment, we’ll look at how the tax changes affect the Masters, two retirees.

The facts

Mr. and Mrs. Master, both in their mid-70s, have been retired for 10 years and live in Atlantic Canada. They both collect CPP and OAS. They also have RRIFs and a joint open, non-registered account.

Read: Personal tax season – Are you ready?

What has changed over the years?

For retirees, one of the first times Canada’s Department of Finance used the word “need” when considering social benefits, tax credits and benefits occurred was 1989, when they implemented the re-payment of OAS benefits based on income in that year’s federal budget. Starting in 1990, higher-income retirees – those with net income exceeding $50,000 (the 2016 threshold, based upon 2015, income is $72,809) – would repay OAS pension benefits at a rate of 15%. Finance indicated at the time that the threshold was meant to ensure that only benefits received by higher-income retirees would be subject to repayment.

Seventeen years later, in 2007, the government introduced the ability to split eligible pension and annuity income between a Canadian pensioner and their spouse or common-law partner (pension transferee) on their respective T1s using Form T1032 – Joint Election to Split Pension Income. These rules have remained unchanged since their introduction. The key considerations in determining whether pension and annuity income is eligible for income-splitting purposes are the nature of the pension income and the age of the pensioner. When the pensioner is 65 or older, there are more eligible pension and annuity income sources, and thus more flexibility in income splitting.

For what eligible pension and annuity income can be split, go to the CRA’s info page.

One source of pension income that is not eligible for pension splitting using Form T1032 is CPP. However, a Canadian receiving CPP can apply to share their CPP retirement pension with their spouse or common-law partner. The portion of the pension that can be shared is based upon the number of months the recipient and/or their spouse or common-law partner lived together during the total contribution period. Learn more here.

As well, the 2008 Federal Budget introduced the TFSA to much fanfare. Starting January 1, 2009, any Canadian resident over the age of 18 could open a TFSA. Any investment income is sheltered from tax, and any withdrawals from are not treated as an income receipt for tax purposes. While the TFSA is geared toward all Canadians, it is a tremendous income splitting tool and a tax-efficient cash flow vehicle for Canadian retirees.

What income splitting or effective tax planning measures remain?

Given Canada’s marginal tax rate system, Mrs. Master is going to pay more income tax on $100,000 than if the Masters each report $50,000. Retirees will benefit from splitting eligible pension income and CPP. Where appropriate, they should also try to draw cash flow from TFSAs and return of capital (ROC) from open, non-registered investments first to generate tax savings and sustain retirement capital.


When working with Canadian retirees, the first consideration at all times is the sum needed on an after-tax basis to support their lifestyle. Next, determine what’s required from the client’s available investment accounts to fund lifestyle after social benefits such as OAS, CPP, pension or RRIF minimum withdrawals. Finally, determine the most tax-efficient means to generate the necessary income or investment capital drawdown.

Over the last 15 years, Finance has introduced various income thresholds on the eligibility of particular personal tax credits, such as the age credit, along with the clawback of social benefits such as OAS.

Read: IIROC’s checklist for helping senior clients

Advisors should be mindful of Canada’s marginal tax system for personal taxpayers, and recognize that pension income splitting and sharing CPP:

  • generates tax savings;
  • maintains or shelters social benefits such as OAS;
  • reserves access to personal tax credits such as the age amount, amounts transferred from your spouse or common-law partner and medical expenses; and
  • sustains a client’s retirement investment capital.

While value can be derived from the above when the Masters are in retirement, our real value as advisors occurs years before – in the retirement planning years. During that period, appropriate investment accounts and solutions can be set up to generate cash flow and tax-efficient income. Canadians counting on only their CPP, OAS, and RRSP/RRIF are restricting themselves in their retirement years. When planning for retirement, Canadians should consider the flexibility offered by TFSAs and open accounts to supplement retirement lifestyle with cash flow and provide control over when, where and how they generate taxable income and over their personal tax rates.

In conclusion, Finance has focused on improving tax fairness and simplicity in compliance for Canadian personal taxpayers in recent years. While these measures have restricted the ability of Canadians to split income and claim various tax credits and other relief measures, there are still a variety of measures available to our clients to realize tax savings.

Michelle Connolly

Michelle Connolly, CPA, CA, CFP, TEP, is a Toronto-based tax and estate planning expert.