Income Splitting in Canada: Pension Splitting, Spousal RRSPs and TOSI

Pension income splitting: up to 50% with Form T1032

Couples can jointly elect to move up to 50% of one spouse's eligible pension income to the other. The transferring spouse deducts the amount on line 21000, and the receiving spouse reports it on line 11600. Both spouses complete Form T1032, Joint Election to Split Pension Income, and file it by the filing due date. Only one election can be made each year, and you can choose a different percentage every year.

Which income qualifies depends on age. Life annuity payments from a registered pension plan qualify at any age. RRIF and life income fund payments and RRSP annuity payments qualify only once the transferring spouse is 65 by the end of the year, or when received because a spouse has died. OAS, CPP and QPP, US IRA income and treaty-exempt foreign pensions cannot be split. Both spouses must be resident in Canada on December 31 and not living apart because of a breakdown of the relationship for 90 days or more that includes December 31.

Worked example: what pension splitting saves in Ontario (2026)

Spouse A has $90,000 of eligible pension income and spouse B has $15,000. Without splitting, combined federal and Ontario income tax is about $18,462. If A allocates $37,500 to B, which is within the 50% limit, both report $52,500 and combined tax falls to about $15,284, a saving of $3,178 a year. This simplified calculation uses only the basic credits. In practice the saving can be larger: the CRA lets the receiving spouse claim the pension income amount (the lesser of $2,000 and the eligible pension income allocated) on line 31400, if they qualify.

Splitting also lowers the transferring spouse's net income, which matters for the OAS recovery tax. That tax takes 15% of net income above $95,323 for 2026. Tax withheld on the pension moves with it: if 40% of the pension is allocated, 40% of the tax withheld on it goes on B's line 43700.

Spousal RRSPs and the three-year rule

A spousal RRSP lets the higher earner contribute using their own deduction room and claim the deduction, while the money belongs to the lower-earning spouse in retirement. In Ontario in 2026, a $10,000 contribution at $130,000 of income saves tax at a marginal rate of about 43.4%. If it is later withdrawn by a spouse with $30,000 of income, it is taxed at about 19.1%.

The catch is attribution. If the contributor paid into any spousal RRSP in the year of a withdrawal or in either of the two preceding years, the withdrawal is taxed in the contributor's hands. The annuitant uses Form T2205 to work out the split. To be safe, stop contributing for three calendar years before the planned withdrawal. You can contribute to a spouse's RRSP until December 31 of the year they turn 71, even if you are older.

Prescribed-rate spousal loans

Giving money to your spouse to invest normally triggers attribution: the investment income is taxed back to you. Section 74.5(2) of the Income Tax Act makes an exception for a loan that charges at least the prescribed rate in effect when the loan is made, where each year's interest is paid no later than 30 days after the end of that year (January 30). The rate stays fixed for the life of the loan. For loans made from October 1 to December 31, 2026, the CRA's prescribed rate is 3%.

Example: you lend your spouse $100,000 at 3%. If the portfolio earns 5% ($5,000), your spouse pays you $3,000 of interest, which you report and your spouse deducts. The other $2,000 is taxed at your spouse's lower rate. If an interest payment is missed even once, the exception is lost for that year and all later years.

CPP pension sharing

Spouses living together can share their CPP retirement pensions. At least one must be receiving, or have applied for, a CPP retirement pension. The shared portion depends on the number of months you lived together during your joint contributory period. The combined total does not change, but moving income to the lower earner can cut tax. Service Canada says pension sharing "is not the same as Canada Revenue Agency's pension income splitting." You apply online through My Service Canada Account or on form ISP1002, and sharing starts when approved; it cannot be backdated.

Tax on split income (TOSI): what does not work

Since 2018, the TOSI rules apply to dividends and certain other amounts that family members receive from a private corporation connected to a related business, but not to salary. Split income is taxed at the highest individual percentage, which is 33% federally in 2026 plus the top provincial rate. It is reported on Form T1206. In practice, sprinkling dividends to an adult child at university gives no saving.

The main exclusions in the CRA guidance and section 120.4 are:

• Excluded business: the family member worked in the business an average of at least 20 hours a week in the year, or in any five earlier years.
• Excluded shares: the person is 25 or older and owns shares with at least 10% of votes and value in a corporation that is not a professional corporation and earns less than 90% of its business income from services.
• Reasonable return: for people 25 or older, a payment that is reasonable given their work, capital and risk in the business.
• Spouse aged 65 or older: an amount is excluded for a spouse if it would be excluded for the business-owner spouse and that owner had turned 64 before the year.