Income Splitting Strategies for Canadian Families
Income splitting involves redistributing income from a higher-earning spouse to a lower-earning spouse to reduce your family's overall tax bill.
- Income splitting moves income from higher to lower tax brackets
- CRA has attribution rules to prevent simple income transfers
- Spousal loans, RRSPs, and TFSAs are legitimate strategies
- TOSI rules apply to payments to family members in corporations
Income splitting involves redistributing income from a higher-earning spouse to a lower-earning spouse to reduce your family's overall tax bill. Since Canada has graduated tax rates, this strategy can create significant savings when done correctly.
Understanding CRA Attribution Rules
CRA has rules to prevent simple income transfers for tax purposes. If you gift money to your spouse, any investment income earned still gets "attributed" back to you for tax purposes. However, several legitimate strategies exist.
Strategy 1: Spousal Loans
You can loan money to your spouse for investment purposes at the CRA prescribed interest rate. As long as your spouse pays the interest by January 30 each year, any investment returns above the prescribed rate are taxed at your spouse's lower rate.
Strategy 2: Spousal RRSP Contributions
The higher-income spouse contributes to an RRSP in the lower-income spouse's name. The contributor claims the tax deduction now, and in retirement, withdrawals are taxed at the lower-income spouse's rate.
Funds must stay in the plan for at least three years to avoid attribution.
Strategy 3: Maximize Spousal TFSAs
Tax-Free Savings Accounts have no attribution rules. You can give your spouse money to maximize their TFSA contribution, and all growth inside the account is completely tax-free.
The 2025 TFSA contribution limit is $7,000 per person.
Strategy 4: Pension Income Splitting
If you're 65 or older, you can split up to 50% of eligible pension income with your spouse using Form T1032.
Need Help With Income Splitting?
Tax Punjabi can help you implement the right approach for your family situation.