Tax planning is a vital part of retirement security for Canadian seniors. One powerful tool—pension income splitting—allows retirees to reduce their tax burden by allocating up to 50% of eligible pension income to a lower-income spouse or common-law partner.
But the Canada Revenue Agency (CRA) has recently tightened enforcement around eligibility rules for 2025. Here’s what retirees need to know to claim the benefit safely and legally.
What Is Pension Income Splitting?
Pension income splitting lets one spouse (the transferring spouse) allocate part of their eligible pension income to the other (the receiving spouse) on taxes, lowering the household’s combined tax liability.
For instance, if one receives $50,000 in eligible pension and $30,000 in other income, they can transfer up to $25,000, reducing their own taxable income to $55,000—potentially placing both in the lowest tax bracket.
To make the split, couples jointly file Form T1032 when submitting tax returns. Only one election per tax year is allowed, and both spouses must agree.
CRA’s Rules & Crackdown: What’s Changed in 2025?
The CRA is now strictly enforcing these eligibility rules:
- You and your spouse must be married or in a recognized common-law partnership.
- You must have lived together during the tax year (exceptions apply only for medical, educational, or business reasons—not for separation or divorce).
- You must be Canadian residents on December 31 of the tax year.
- Form T1032 must be accurately completed, signed by both parties, and attached to your return.
- Only eligible pension income qualifies—meaning certain public benefits and CPP/QPP are excluded.
Non-compliance or attempt to split ineligible income may trigger a CRA review, reassessment, or penalties.
What Counts as Eligible vs. Ineligible Pension Income?
Here’s a breakdown of what’s allowed and what’s not when it comes to pension splitting:
| Eligible Pension Income | Ineligible Income |
|---|---|
| Registered Pension Plan income | CPP/QPP benefits (including shared CPP) |
| RRSP annuity payments | Old Age Security (OAS) |
| RRIF income | Government pensions or benefits like OAS |
| Deferred Profit-Sharing Plan annuity | Foreign pension income tax-exempt under treaties |
| Life annuities (e.g., from death benefits) | RRIF to RRSP/rescoped transfers during year |
Why the CRA Is Cracking Down
The CRA’s enforcement ramp-up reflects a priority shift toward ensuring tax fairness and reducing misuse. Increased audits—across areas such as unreported income, offshore assets, the gig economy, and now pension splitting—demonstrate their commitment to protecting the tax system’s integrity.
Misuse of pension splitting can arise from:
- Attempting to split income with a separated or divorced partner
- Failing to submit or incorrectly completing Form T1032
- Including ineligible income types
- Falsely claiming residency or cohabitation
How Retirees Can Comply — 4 Key Steps
- Verify Eligibility
Ensure you and your spouse or partner lived together in the tax year and are not in the process of separation or divorce. - Confirm Eligible Income
Only split income that legally qualifies—Registered Pension Plans, RRIFs, etc.—not CPP, OAS, or similar. - File Form T1032 Correctly
Complete the form carefully, have both spouses sign it, and include it with your tax return before the filing deadline. - Seek Expert Help If Needed
For complex cases—like offshore residents or blended household situations—a tax professional can help you avoid pitfalls.
While pension income splitting remains a valuable tool for reducing taxes in retirement, retirees must take care to follow CRA’s rules—especially now as enforcement tightens in 2025.
By confirming eligibility, using proper documentation, and ensuring only valid pension income is split, couples can freely reap the benefits without risking audits or penalties.
FAQs
Who qualifies for pension income splitting?
You must be legally married or in a common-law partnership, co-reside for the tax year, and both be Canadian residents as of December 31 of that year.
Can CPP or OAS be split under CRA rules?
No. Only income from pensions like RRIFs, RRSP annuities, or Registered Pension Plans can be split. CPP/QPP and OAS are not eligible.
How do I make the split legally enforceable?
Submit a completed Form T1032 signed by both spouses with your tax return—only one election per year is permitted.