A portion of this article was originally written in June 2009, but relevant today due to the removal of the income splitting Family Tax Cut which allowed a family to notionally transfer up to $50,000 from the higher income spouse to the lower when filing taxes.  While many will take a hit from elimination of this tax benefit (like our family), there are still a number effective income splitting strategies available.

There are a good portion of families that have lop sided incomes between spouses. That is, one spouse makes significantly more income than the other. At a high level, income is income. However, if you look a bit deeper, spouses with lopsided incomes pay higher overall tax than spouses with equal income (assuming both have equal overall income).

For example, for tax year 2016, an Ontario family with a single earner making $100k would pay approximately $22.6k income tax (including spousal credit). Another family with both spouses making $50k each would pay a total of approximately $16.4k income tax.  Both families have the same total income, but one family has an extra $6,200 in annual cash flow.

While many assume that income splitting strategies are for the wealthy, there are income splitting strategies for all income levels.  Some of the strategies below are a bit more advanced than others but take a look to see what can apply to your situation.

Tax Free Savings Account (TFSA)

One of the perks of the new tax free savings account (TFSA) is that the higher income spouse can contribute to the lower income spouses TFSA without any tax implications.  That is, the lower income spouse receiving the TFSA contribution gift can do whatever he/she pleases with the money without having to worry about the timing and taxation when withdrawing from the TFSA (unlike a spousal rrsp, see below).

Separate Accounts

When investing in a non-registered (taxable) account, the taxation of capital gains, dividends and interest are attributed back to the person who funded the account. So in the case of one spouse making significantly more than the other, it’s more than likely that the investment taxes would be taxed in the hands of the spouse receiving the higher income.  At least that’s how CRA would interpret the scenario.  If you’re in this situation, there is a solution to this problem.  Keep separate chequing accounts, and use the higher income spouse to pay all of the household expenses (including income taxes owing for the lower income spouse).  Then use any cash left over from the lower income spouse to invest.  This will help ensure that investment gains and/or income will be taxed at a lower rate.

Loan Money to the Lower Income Spouse

If the higher income spouse has a large lump sum to invest, instead of investing it him/herself, the money can be loaned to the lower income spouse to invest with.  As a result,  the lower income spouse will pay the interest (tax deductible) and the higher income spouse will pay the interest tax on the 1%.  According to Taxtips.ca, the current CRA prescribed rate for a spousal loan is 1% (until at least June 2016).

Spousal RRSP

A spousal RRSP will allow the high income earner to contribute to a spousal RRSP while claiming the tax deduction for him/herself. This strategy also allows for the lower income spouse to withdraw from the spousal RRSP during low income years (providing the timing is right).  The real benefit of this strategy is that it helps even out the incomes during retirement.  This in turn will reduce the overall family taxation.

More details on the spousal RRSP here.

Pension Splitting

This is another retirement income splitting strategy where pensions can be split to reduce family taxation.  Pensions like registered pensions (like defined benefit pensions), Canadian Pension Plan (CPP), Registered Retirement Income Fund (RRIF), and annuities all qualify for pension splitting.  Most tax software packages (or an accountant) will take care of this splitting and optimize your tax return.

Dividend Sprinkling

This a strategy where a family has business income and  owns a private corporation (ccpc).  In this scenario, the ideal situation is where both spouses are shareholders, but of different share classes.  The reason being is that the corporation and choose the share class that will receive the dividend.  Highly paid professionals, like Doctors, use this strategy often, especially if her/his spouse does not make as much income.  In this case, the doctor’s corporation will be setup with dual (or more) share classes which gives the ability for the corporation to distribute dividends to the lower income spouse, thus lowering overall family taxation.  More information on the dividend sprinkling strategy here.

Do you and your family practice any income splitting strategies?  If so, I’d like to hear about them in the comments.

Notify of

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Inline Feedbacks
View all comments