Income splitting
One of the most effective — and often underused — tax strategies available to Canadian families is income splitting. By shifting income from a higher-income individual to a lower-income family member, you may be able to reduce your household’s overall tax bill and keep more of your wealth working for you.
The most common opportunities for income splitting include:
Spousal RRSPs
Pension Income Splitting
Prescribed Rate Loans Between Family Members
Contributions to a Spouse’s TFSA
Splitting CPP Retirement Benefits
Income Allocation in Family Trusts
Spousal RRSPs allow a higher-income spouse to contribute to a plan in their partner’s name, providing an immediate deduction while shifting future withdrawals to the lower-income partner. Pension income splitting — available after age 65 — lets eligible couples split up to 50% of qualifying pension income, which can lower the effective tax rate for both.
Prescribed rate loans are another useful tool, where income earned on funds loaned to a lower-income spouse or adult child is taxed at their lower rate, as long as interest is charged at the CRA’s set rate and paid annually. This is often used in conjunction with investment accounts or family trusts to manage larger portfolios.
Canadians can also split Canada Pension Plan (CPP) payments between spouses, which may reduce OAS clawbacks or bump each person into a lower tax bracket. For incorporated business owners, paying reasonable salaries to family members who contribute to the business is another way to shift income while staying compliant with CRA rules.
In all cases, income splitting must be done carefully and within CRA guidelines. There are attribution rules that can cause income to be taxed back in the hands of the original earner if not structured properly.
