XEQT and Pension Income Splitting: How Couples Reduce Retirement Tax

What Is Pension Income Splitting

Pension income splitting is a notional transfer, not a real transfer of funds. You do not move money between accounts. Instead, when both spouses file their returns, you jointly elect to treat up to 50% of the eligible pension income as if it were received by the lower-earning spouse. Both spouses report their share, pay tax at their own marginal rates, and the household collectively pays less tax than if all the income were reported by the higher earner.

The mechanism: the higher-income spouse claims a pension income deduction on their return (line 21000), and the lower-income spouse adds the same amount as pension income on their return (line 11600). The CRA reconciles the two returns through the joint Form T1032 election, which both spouses must sign and file.

What Income Qualifies: RRIF and the Age 65 Rule

For Canadians aged 65 or older at the end of the tax year, eligible pension income includes:

• RRIF withdrawals (including the minimum), life income fund (LIF), and restricted LIF payments.
• Annuity payments from an RRSP or deferred profit-sharing plan (DPSP).
• Life annuity payments from a registered pension plan (RPP).
• Certain qualifying payments from a retirement compensation arrangement.

For XEQT investors, the most relevant category is RRIF withdrawals. Once you convert your RRSP to a RRIF and reach age 65, every dollar you withdraw (including the mandatory minimum) is eligible for pension income splitting. You can allocate up to 50% to your spouse in any given year, and the amount does not have to be the same percentage each year. This annual flexibility is a genuine planning advantage.

What Does Not Qualify: CPP, OAS, and RRSP Withdrawals

Several major retirement income sources are not eligible for pension income splitting and cause confusion:

• Canada Pension Plan (CPP) and Quebec Pension Plan (QPP): Not eligible for pension income splitting. CPP has its own separate sharing mechanism through Service Canada, which is different and based on years of cohabitation.
• Old Age Security (OAS): Not eligible for pension income splitting.
• RRSP withdrawals (before conversion to annuity or RRIF): Not eligible unless the annuitant is under 65 and the withdrawal is due to the death of a spouse.
• RRIF withdrawals under age 65: Not eligible unless received as a result of the death of a spouse.

This last point is why converting part of your RRSP to a RRIF at age 65 is often advisable even if you do not need the income. A $2,000 RRIF withdrawal at 65 makes that income eligible for both the pension income credit and pension income splitting, without requiring the full RRSP conversion that becomes mandatory at 71.

The Pension Income Tax Credit

The pension income tax credit (PIC) is a non-refundable federal tax credit of 15% on the first $2,000 of eligible pension income. This translates to a $300 federal tax reduction each year, plus the applicable provincial credit. For a couple where both spouses are 65 or older, both can claim the credit if both have eligible pension income, potentially doubling the household benefit to $600+ in federal credits alone.

The strategic implication: if you and your spouse have no workplace pension and no other eligible pension income, converting a small portion of your RRSP to a RRIF at age 65 and withdrawing exactly $2,000 per year unlocks the pension income credit for the primary earner. Splitting that $2,000 with a spouse over 65 potentially unlocks the credit for both spouses, generating $600 in combined federal credits from a single $2,000 RRIF withdrawal.

How to Claim It: Form T1032

Pension income splitting is not automatic. Both spouses must complete and attach Form T1032 (Joint Election to Split Pension Income) to their paper tax returns, or select the pension income splitting option in their tax software. The form asks for the total eligible pension income of the transferring spouse and the elected amount (the portion being allocated to the receiving spouse, which can be up to 50%).

The election is fully flexible year by year. In a year where both spouses have similar income, splitting 0% makes sense. In a year where one spouse has a large RRIF income and the other has little income, splitting the full 50% maximises the tax saving. Tax software can model the optimal split percentage for your specific situation in minutes. An accountant or fee-only financial planner can optimise this across multiple years.

Using Splitting to Protect OAS

The OAS clawback threshold is $90,997 in 2025 (indexed annually). If your RRIF income, CPP, OAS, and other sources push your individual net income above this threshold, you begin losing OAS benefits at 15 cents per dollar of excess income. For retirees with large RRIF balances, this is a genuine risk.

Pension income splitting can shift RRIF income from a spouse with income above the clawback threshold to a spouse with income below it, preserving OAS for the higher earner while keeping the receiving spouse's income within a manageable bracket. The OAS benefit alone is worth $7,000 to $9,000 per year in 2026, making the clawback management significant over a multi-decade retirement.

A Worked Example With XEQT in a RRIF

Marcus (age 72, Ontario) has $800,000 in a RRIF holding XEQT. Mandatory minimum at 5.40% = $43,200 withdrawal. He also receives $15,000 CPP and $8,700 OAS for total income of $66,900 before the RRIF withdrawal. With the RRIF withdrawal, income is $110,100. His marginal rate on the top bracket is 43.41%. His spouse Diane (age 70, Ontario) has $22,000 in income from CPP and a small company pension.

Without splitting: Marcus pays tax at 43.41% on the portion of RRIF income above the bracket threshold, and his OAS begins to be clawed back at $95,323.

With 50% pension income splitting: Marcus allocates $21,600 (50% of $43,200 RRIF) to Diane. Marcus's income drops to $88,500, below the clawback threshold. Diane's income rises to $43,600. The $21,600 shifted to Diane is taxed at approximately 29.65% (her marginal rate) versus 43.41% at Marcus's rate. Tax saving on the shifted income alone: approximately ($43,200 x 50%) x (43.41% - 29.65%) = $2,970 in combined annual tax savings, plus the OAS clawback is eliminated.

How Spousal RRSP Complements Pension Splitting

Pension income splitting allows a maximum 50% transfer. Spousal RRSP contributions, made during the accumulation phase, build retirement income directly in the lower-earning spouse's name that can later be withdrawn at their lower marginal rate without any 50% cap or eligibility requirement. The two strategies are complementary: spousal RRSP builds equalised registered balances for retirement, while pension income splitting optimises the drawdown of whatever registered balances exist. For the full analysis, see our guide on Spousal RRSP and XEQT.