Many of the income splitting opportunities have been curtailed by a set of rules known as the attribution rules. When opportunities are available, they can be complex, expensive, and difficult to maintain. However, if you and other family members are in very different tax brackets, the benefits may be substantial.
Record Keeping
Proper records are a must when establishing an income splitting arrangement. If the CRA comes knocking at your door asking questions, you will need prove what you have done was allowed.
You should maintain separate bank accounts and keep detailed records. Avoid transfers between accounts through on-line banking and write cheques to establish a paper trail. Be sure to fully document the terms and repayment of any loans provided as well as documenting how any transfers of property occurred.
Income Splitting Opportunities
- The higher income-earning spouse pays all of the family expenses that are not deductible, including the income taxes of the lower spouse. The lower income spouse then uses their income for investment.
- If a new business is started, allow lower income family members to acquire an equity position. Consult a professional for advice on structuring such an arrangement.
- If you own a business, employ your spouse or children and pay a reasonable salary.
- If the CRAs prescribed rate of interest is lower than investment yields, it may be beneficial to lend funds at the prescribed rate to a family member who reinvests the funds.
- Spousal RRSP’s have a limited potential for income splitting. The goal should be to ensure both spouses have the same income in retirement.
- Split your pension income with your spouse (see our article on Pension Income Splitting). Also, TurboTax has a pension income splitting optimizer to help you decide the right amount.
- Tuition fees do not have to be actually paid by the student to receive the tuition tax credit. A parent may pay the expense and the student may still claim the credit.
- If a related minor or spouse receives a gift or inheritance from a source that the income splitting rules would not have applied, the funds should be held in a separate account and “not” be used for household expenses.
- Property that has the potential to earn capital gains should be given to minor children rather than a spouse.
- If funds are given to a child in their 17th year and a term deposit is acquired where the interest will pay in their 18th year. The interest will be tax in their hands in the following year
- If a child has employment income, lending funds up to an amount to which they would earn from employment, interest free, will free the child’s employment income to earn investment income. The funds lent would then be used for their own purchases.
- Income earned from Canada child tax benefit payments invested in the child’s name will not be attributed.
Looking For Professional Help?
If you’re looking for advice or tax planning services, you can contact me directly through my professional tax practice.
Related Articles
- What is Income Splitting?
- Income Splitting For Business Owners
- Income Splitting With Loans To Your Spouse
- The Income Splitting Rules
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Need clarity. I have paid everything for both my spouse and I while she attended University this past year. She did not bring any income into the equation. As point #1 mentions “The lower income spouse then uses their income for investment.” My spouse has no income to invest as she didn’t make any… can I still split my income with her?
Hi Dean:
No. You cannot split your income with your spouse. There are no real opportunities to split income already earned unless you are over age 65 and receiving pension income.
All other opportunities require planning beforehand and a long time frame.
I have paid my son tuition fees $20000 last year. Can I split my income with him?
Hello Huang:
If your son attended an eligible institution, he may be able to claim certain tax credits and, at his discredtion, he may transfer unused credits to his parents.
Is income splitting allowed between two people, if the spouse has left their wife, and he has moved in with his boyfriend?
If this is not allowed what are the potential penalties?
Hi,
Husband and wife works at the same company. One makes way more than the other. Can payroll add the two incomes then divide it by two and pay from that split amount? Is that allowed.
The payroll department cannot move money from one person to another.
You could ask to have the higher income sposue’s salary reduced and the higher income sposues’ salary increased.
Sorry, I mean salary. Here’s an example:
Husband 100K
Wife 40K
Total 140K
So payroll could split it to 70K each and calculate pay from it?
The employer would need to agree to the plan and the wife’s salary would need to be reasonable given the work done.
I’d hire an accountant to obtain an opinion before putting the plan into action.
Hi,
Could you please comment on the following situations:
I work and my wife stays at home and she has no income. After I have paid all the taxes and expenses (including rrsp/tfsa contributions) for the year, we have leftover cash/savings of around $8K. We intend to split the leftover cash 50/50 between my wife and I and put them in non-registered accounts. For the next year, will the income earned from my wife’s $4k portion be attributable to her or to me?
Thank you for your help.
Hello T Hoang
The income would be attributed to you.
Am I allowed to buy income generating stocks and put them in my wife’s name? Right now she works full time but earns less than me so there would be a potential tax savings, and eventually she will e off totally, making the investment income her only income. Is that allowed?
There are anti avoidance rules that would tax All investment income in your hands.
I am retiering this year can I income split with my wife Iwell be 60 my wife well be 54
@Mike:
You can only split income that is eligible for the pension income tax credit. See point #6 above.
I am a commissioned sales person. Can I pay my about $5000.00 per year for getting me leads. Can I claim this $5000.00 as I paid salary to wife. How that effect her. She only have about $6000 in rrsp income.
You may be able to employ your spouse and claim the expense as long as you are required to incur these expenses under your contract.
The amount you pay your spouse must be reasonable and reflect what would you would have paid an outside party to do the same work. You must also be able to substantiate that the work was actually done.
I suggest you work with your accountant to structure this correctly.
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