Reduce your Taxes – Income Splitting Strategies

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, 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.

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

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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BC Game Developer
7 years ago

I have a question related to selling your primary residence? Living in Vancouver housing prices are out of control and we are thinking of cashing in. Our house is in both my wife and my name, although I am the only income earner in the family and have paid for the mortgage over the years. Does this mean that the profits of the house sale are attributed to me or can it be split between my spouse and I.

7 years ago

At what income level for the higher earner or what total family income does it really make sense to have an account or tax specialist look at your situation if you are both employees?

It would seem they would need to find a significant way to reduce your taxes to make it worth it. I make 3x my wife but we have always done our own taxes, etc.

7 years ago

At what income level for the higher earner or what total family income does it really make sense to have an account or tax specialist look at your situation if you are both employees?

It would seem they would need to find a significant way to reduce your taxes to make it worth it. I make 3x my wife but we have always done our own taxes, etc.

7 years ago

Here is my strategy:

1. Both me and my wife are employed by my corporation, so split the income by simply paying us equaly salaries. Moreover, I keep those salaries low, so that they don’t hit higher tax bracket.
2. The remaining income stays in corporation and is taxed at 16%. I then borrow those funds and I avoid personal income tax in 40% bracket. Eventually I will have to pay them back, but till then I can save on taxes and have more money for investing.
3. When we max out our TFSAs, we can start RRSP and claim tax credit without having paid those taxes in that year, due to huge accumulated contribution room.
4. I also may choose to return the debt and pay those funds as salary in a year of lower income.

7 years ago
Reply to  FT

I can borrow for as long as my corporation allows me to borrow (i.e. indefinitely :) ).

As of interest rate, my accountant has suggested 1% rate. I haven’t paid the interest before, since this is first year I am borrowing from my corp. (going to pay it at the end of fiscal year in July). My understanding is that the rate cannot be less than Central Bank’s overnight rate (currently 0.5%) or the “Bank Rate” (currently 0.75%).

7 years ago
Reply to  FT

An update:

As my fiscal year ended recently, I had to take care about taxes related to borrowing funds from corporation. Here is what I have learnt from my accountant.

CRA defines a set of “prescribed rates” (see The one that was of my interest is described in Income Tax paragraph as follows:

“The interest rate used to calculate taxable benefits for employees and shareholders from interest free and low-interest loans will be 1%.”

What does it mean? When I borrow from corporation for lower that this prescribed rate (including interest-free loan), the saved interest becomes taxable benefit and should be reported in my individual tax return. E.g. if $100K is borrowed for 0.7%, then remaining 0.3% ($300) become my taxable benefit and are taxed at whatever tax bracket they fall into. 0.7% interest paid to corporation becomes corporate income and is taxed as such.

If the money are borrowed at 1% or higher, then no taxable benefit is produced for me. Since corporate tax rate is lower than my individual rate, it makes more sense to go with 1+% and pay taxes at corporate rate.

11 years ago

“Keep separate chequing accounts” – What about 2 joint checking accounts with different banks? Each spouse gets paid in one of the 2 accounts (keeping them joint for practicality) so it is fairly easy to track everything.

Will that work with two joint accounts at the same institution (1 checking and 1 savings)

Appreciate your opinion

12 years ago

I make over $100,000 and my husband does not work at all. What can I do regrding income splitting, if we are not retirement age?

Can you provide me with a thorough explanation and recommendation please.

What options are avaialble to me? Ontario/Canada

14 years ago

Hi Everyone,
My spouse and I are 30 years old, I make $160k a year and my spouse is a full time student with no income. We are planning to have children shortly and will continue to be in the same situation for at least the next 3 years where I bring in the income for the family.
I would like to understand what other options are available to split the income for the purpose of reducing the taxes we pay every year?
Can you share feedback on if you think it would be beneficial for me to approproach my employer to pay me as holding company (which I could split with my spouse)? Is this a worthwhile exercise based on the income I make?
What are some of the considerations I would need to consider by not being a full time employee? Would I need to be insured/WSIP/Medical benefits/Disability?

I will paying over $50k in taxes again this year and want to see what other options we have available.

Ms Save Money
14 years ago

The separate accounts really helps. I’m the saver in the relationship and my significant spends everything. If I didn’t save for us – we definitely wouldn’t have any money at all.

14 years ago


You are correct. An additional set of books and tax filing is required for the trust as well as for the holding company. The income company has to be large enough to generate enough tax savings and defferal options to warrant the additional expense and time that it takes to administer it. I maintain most of the accounting myself and our accountant just does the final tax filing for us, but it still costs around $1,500/year.

There are a couple of reasons I do not retain excess income in the main corporation. The first and most important is capital/liability protection. If something does occur (nothing that I am anticipating, but stuff happens) and the main corporation has to file for bankruptcy or gets hit with a massive lawsuit above our liability insurance limits, the additional retained earnings are protected in the holding company and are still available for personal income purposes. With the exra cash that sits in the holding company, I can then invest it in to an array of income-generating options, including other companies, stocks, bonds, whatever.

When the main corporation has a good year and issues a large dividend, we only have to take (and pay tax on) what we need personally and leave the rest in the holding company to with as it wishes. Then if we have a poor year, we can draw a little extra from the holding company to even out the bumps and reduce our overall tax burden (the tax rate on high income is brutal). Having two years pulling $50k/year each instead of $100k in the first year and $0k in the next will produce a better overall tax rate.

The holding company is also where I am building up funds for my children and when they turn 18, they can receive a “management fee” from the holding company which can go towards tuition, living expenses, etc. As they will be earning little to no other income, most of this money will flow to them tax free. The idea is that I will not give them a single penny personally: Whatever they need (as long as I approve the expense, of course!) will come as a dividend from the holding company, through the trust and in to their hands as low (or no) tax dollars.

Another advantage: Because the trust owns the shares of the income generating corporation, when the day arises that I decide to sell the company and record the capital gain on the shares, because the trust owns it, the trust receives the capital gain. I can then split this capital gain between myself and my children and *each* person can claim up to the $750,000 small business capital gains exemption. That means our family could potentially make a $3,000,000 capital gain on the sale of the company and not have to pay a single penny in tax. Compare that to if I held the shares myself and had to pay capital gains tax on $2,250,000!

7 years ago
Reply to  Sarlock

Hi Sarlock,

I’m intrigued! This is an interesting way to structure things and I’ve just recently been reading up on trusts in Canada.

I’m assuming your trust makes no money in any given year and thus pays no tax, because any dividends would flow through to the beneficiaries (you and your wife) and taxed in your hands or transferred to the holding company for investment.

I’m wondering if you have any comments for your situation on the 21-year rule, which says the trust needs to dispose of all it’s assets after 21 years. Is your plan to sell your company and payout all the assets before then?

I’m also wondering if this is a good way to go for rental properties. Basically setup a company to own and run the rentals and then either move income to holding company or distribute to beneficiaries.

Last question, For the holding company and income earned (interest, dividends, or capital gains) it would need to pay tax correct? Is that at the business tax rate of 16%?

Thanks for the great comments,