Most Canadians focus on how much income they earn, but not enough on when that income is earned and recognized. This is especially important for tax purposes. In Canada, our tax system is progressive and big spikes in income can push you into higher tax brackets and cause government benefit claw backs in certain years. The solution to handling these spokes in income is through a powerful tax planning strategy known as income smoothing.  

Income smoothing means spreading taxable income more evenly across multiple years. By doing so, you can lower your total lifetime tax, preserve benefits like Old Age Security (OAS) or the Guaranteed Income Supplement (GIS), and avoid paying top marginal tax rates unnecessarily.  

This article explores why income smoothing matters in Canada, with practical case studies, numbers, and strategies you can use. 

Why Income Smoothing Works in Canada 

Canada’s tax system creates three key problems for people with uneven income patterns: 

• Progressive tax brackets: The more you earn, the higher your marginal tax rate. In Ontario, the 2025 top combined rate is about 53.53% on income over ~$246,000. Someone earning $200,000 in one year and nothing the next years pays more tax than someone earning $100,000 in each year.

• Benefit clawbacks: Programs like OAS, GIS, the Canada Child Benefit (CCB), and GST/HST credits are tied to net income. A high-income year can reduce or eliminate benefits, even if future income is modest. 

• Cash flow unpredictability: A sudden spike in income can leave you with a tax bill that comes due before you’ve planned for it. 

Why “Lifetime Tax Paid” Matters  

When we talk about income smoothing, the real benefit isn’t always visible in a single tax return. The true savings come from looking at your lifetime tax paid i.e. the total amount of tax (and benefits lost through clawbacks) across decades. 

Here’s a simple illustration: 

Scenario: RRSP Withdrawals vs. Smoothing 

• • Scenario #1: At age 62, Paul has a $600,000 RRSP. If he waits until 72 to convert to a RRIF, mandatory withdrawals will push his income into higher brackets and cause OAS clawbacks. Over 20 years, he could pay about $280,000 in tax plus $40,000 in lost OAS, for a lifetime cost of $320,000. 

• • Scenario #2: If instead Paul starts withdrawing $20,000 per year between ages 62–71, his RRIF is smaller at 72, his annual withdrawals are lower, and his total taxable income stays in modest brackets. Over 20 years, he might pay about $220,000 in tax with no OAS clawback. 

Result: In Scenario #2, Income Smoothing saves Paul about $100,000 in lifetime taxes and benefits without changing the total amount withdrawn. 

This is the power of income smoothing. By planning the timing of withdrawals, bonuses, or capital gains, you can reduce the total tax you pay over your lifetime, not just in a single year.  

Case Study 1: Owner-Manager Bonus Planning  

Scenario: A business owner has $200,000 of corporate profits available. 

• Option A: Lump sum bonus in 2026: 
  • • Entire $200,000 included in 2026 personal income. 

• • • First $100,000 taxed at ~27% → $27,000 tax. 

• • • Second $100,000 taxed at ~47% → $47,000 tax. 

• • • Total tax: ~$74,000. Net after-tax: $126,000. 

• Option B: Smooth across two years: 

• • • $100,000 paid in 2026, $100,000 in 2027. 

• • • Each year, income stays around $100,000. 

• • • Each $100,000 taxed at ~27% → $27,000 tax per year. 

• • • Total tax: ~$54,000. Net after-tax: $146,000. 

Result: Income smoothing saved $20,000 in taxes simply by spreading the same bonus across two years. 

 Case Study 2: Protecting Retirement Benefits (OAS Clawback)  

Old Age Security (OAS) is reduced once net income exceeds about $90,000 (2025 threshold). For every $1 above, you lose $0.15 of OAS.  

Scenario: Susan has $85,000 in income from pensions and investments. She is considering a $50,000 RRSP withdrawal. 

• Option A: Full $50,000 withdrawal in 2026: 

• • • Total income = $135,000. 

• • • OAS clawback = ($135,000 – $90,000) × 15% = $6,750 lost OAS. 

• Option B: Withdraw $25,000 in 2026 and $25,000 in 2027: 

• • • Each year income = $110,000. 

• • • OAS clawback per year = ($110,000 – $90,000) × 15% = $3,000. 

• • • Total OAS lost = $6,000 instead of $6,750. 

• • • Taxable income stays in a lower bracket each year. 

Result: Income Smoothing saved OAS, reduced marginal tax rates, and lowered total lifetime tax. 

Case Study 3: Timing Investment Sales 

Capital gains are only taxed when realized, giving investors control over when to trigger income. 

Scenario: John plans to sell a rental property with a $100,000 capital gain. 

• Option A: Sell in a high-income year ($150,000 of other income): 

• • • Taxable income = $150,000 + $50,000 (half of the gain). 

• • • Total = $200,000 → much of the gain will be taxed at 47–50%.

• Option B: Sell in a low-income year ($50,000 of other income): 

• • • Taxable income = $50,000 + $50,000 = $100,000. 

• • • Entire gain taxed in middle brackets at 27–32%.

Result: By timing the sale, John could save $7,500–$10,000 in tax on the same gain. 

Case Study 4: Early RRSP Withdrawals 

 RRSPs must be converted to a RRIF by age 71, with mandatory withdrawals beginning at age 72. For retirees with large balances, these withdrawals can push income into high brackets and eliminate OAS. 

 Scenario: Paul, age 62, has little income and a $600,000 RRSP. 

• Option A: Do nothing until 71: 

• • • At 72, forced RRIF withdrawals start at ~$31,680 (5.28%). 

• • • With CPP, OAS, and other income, his total could exceed $100,000 annually. 

• • • This risks OAS clawback every year. 

• Option B: Withdraw $20,000 annually from ages 62–71: 

• • • His taxable income stays moderate. 

• • • At 72, RRIF balance is smaller, reducing forced withdrawals. 

• • • He avoids breaching the OAS clawback threshold.

Result: Early withdrawals can smooth retirement income and lower lifetime tax. 

Conclusion 

Income smoothing is not about avoiding tax. By spreading income over multiple years, Canadians can reduce total lifetime taxes, preserve government benefits, and protect after-tax cash flow.  

Whether you are a business owner, retiree, or investor, the key is to plan ahead and work with a tax professional who understands how to balance timing, tax brackets, and benefit thresholds. 

Would you like to discuss how income smoothing can help you? Get in touch with us here or sign up to get more accounting and tax tips in our newsletter here. 

The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.