Can spouses split pension income to reduce taxes in Ontario?

Yes. Pension income splitting is a federal provision that allows spouses or common-law partners to allocate up to 50% of qualifying pension income from the higher-earning spouse to the lower-earning spouse for tax purposes, without actually transferring the cash. This is done by completing Form T1032 on your joint tax returns. Both spouses must agree and file the election in the same tax year.

Qualifying pension income includes annuity payments from a defined benefit pension plan, RRSP annuity payments, RRIF withdrawals (for those 65 and older), and certain other qualifying amounts. CPP, Old Age Security (OAS), and Employment Insurance are not eligible for pension splitting.

The lower-income spouse reports the transferred amount as their own pension income and may access the pension income tax credit on it; the higher-income spouse deducts the same amount from their income. Because federal marginal rates and Ontario provincial rates both apply to each spouse's individual income, the combined tax bill for the couple is typically reduced when income is moved from a higher to a lower bracket.