Denika Heaton, BBA, JD, TEP, CEA Senior Counsel, Tax & Estate Planning, Private Wealth
Chris Hanley, CPA, CA, CFP®, TEP Senior Tax Planner, Tax & Estate Planning, Private Wealth

Why Income Smoothing Matters 

For most retirees, income is relatively predictable from year to year. Payments from the Canada Pension Plan (CPP), Old Age Security (OAS), a personal Registered Retirement Income Fund (RRIF) and other investment accounts tend to be stable. But certain events introduce a sudden, large taxable amount into a single calendar year. The most common examples include:

• Sale of a business: the resulting tax liability may be significant if the proceeds are not sheltered, in whole or in part, by the Lifetime Capital Gains Exemption.
• Sale of a cottage, vacation, or rental property: these may not be eligible for [the principal residence exemption] and the capital gain is taxable.
• Reallocation of an investment strategy: changing investment holdings within a portfolio, as part of regular rebalancing, changing strategy, or reducing a concentrated position, can result in significant capital gains. 

• Pension commutation: taking a lump-sum payout from a defined benefit pension rather than receiving it as monthly income may result in a large taxable amount in the year of commutation.

These are distinct from the kind of ongoing income differences between spouses that are addressed by income splitting strategies. The key issue here is that Canada's personal income tax system is progressive: the more you earn in a single year, the higher the rate you pay on each additional dollar. In 2026, the top combined federal and provincial marginal tax rates range from roughly 47% to 54%, depending on your province. By contrast, if that same income were spread across two or three years, more of it would be taxed at lower rates.

Beyond the higher marginal rates, large income spikes can trigger or worsen OAS recovery tax, also known as OAS clawback. In 2026, the OAS recovery tax begins at net income of approximately $95,000. For every dollar earned above that threshold, 15 cents of OAS is clawed back. A single year of unusually high income can eliminate OAS entirely for that year resulting in a meaningful loss of that benefit in addition to the income tax cost.

The most important step is also the most often skipped: understanding the full picture before the event occurs. Several questions will shape which strategies are available to you.

1. How much tax is actually at stake?

Before exploring strategies, it is worth pausing to get a rough sense of the expected tax cost. If you are realizing a large capital gain the size of the tax impact varies considerably depending on the gain, your other income, and your province of residence. Understanding the approximate magnitude helps you determine how much time, effort, and planning complexity is warranted. A modest tax bill may not justify elaborate restructuring; a substantial one may.

2. Can you choose which year the income or gain is realized?

For most significant events, the timing is driven by circumstances, not tax planning. A business sale closes when the deal is done; a pension commutation happens when you leave the plan; a property sells when the right buyer appears. Tax considerations shouldn't delay or derail decisions of large magnitude for incremental savings. The more useful question is whether there is a natural window of flexibility once this triggering event presents itself. If so, consider choosing a year when your other income is lower. For example, the year after retirement, before CPP or OAS begins or before mandatory RRIF withdrawals kick in, can make a meaningful difference to the tax result.

3. What other income sources will you have that year?

Your employment or self-employment income, CPP, OAS, RRIF or LIF withdrawals, pension payments, and rental or investment income all contribute to your taxable income before the one-time event is added. Understanding your base income provides a clearer picture of how much room remains in lower tax brackets.

4. Are you under or over age 65? Under or over 72?

Age affects your available tools. Pension income splitting with a spouse, where eligible pension income can be reallocated on your tax return, becomes available at age 65 for most types of income. If you or your spouse will be age 72, mandatory RRIF minimum withdrawals begin, which adds to base income going forward and must be considered.

Your answers to these four questions set the stage for planning. No single strategy fits every situation; the most effective plans combine several of these tools and are tailored to your specific circumstances. In the next article in this series, 5 Tax Strategies for Retirees Navigating Major Life Events, we will discuss how harvesting capital losses, deferring other income, charitable giving, coordinating income and credits with your spouse, and using reserves can help minimize the tax impact.