The Right and Wrong Way To Split Income

by Tax Guy - Burlington Accountant on July 27, 2009 Print This Post Print This Post

As an individuals income increases so does the rate of income tax charged. At the federal level, you will pay 15% on the first $40,726 of income, 22% on the next $40,726, 26% on the next $44,812 and 29% on any income over $126,264. Each province has similar graduated tax rates (except Alberta, which charges a flat 10% on all income).

What Does This Mean?

An individual taxpayer earning $80,000 per year will pay around $20,000 of combined federal and provincial taxes. If this individual could allocate $40,000 to his or her spouse, they would each pay around $7,000 each of tax. Splitting income would save this couple $6,000 a year and reduce their taxes by 30%!

The Wrong Way To Split Income

The Canadian Income Tax Act contains a set of rules that are specifically designed to prevent individuals from shifting income between family member. Some common misconceptions surrounding income splitting include:

  • Joint Accounts. Married couples often assume they can split their investment income in a joint account. In fact, the allocation of income between the joint owners is based on their proportional contributions to the account.
  • Gifting To A Spouse. If you gift assets (or cash) to your spouse, any investment income and capital gains will continue to be taxed in your hands unless your spouse pays for the assets with their own money.
  • Gifts To Minor Children. Setting up a trust, informal trust and investing for a child, grandchild, niece or nephew will not completely avoid income being taxed in your hands. You will be responsible for the tax on dividends and interest until the child turns 18 but the child will be taxed on capital gains.

While the Income Tax Act limits our ability to split income, there are perfectly legitimate ways for family members to split income.

Top 6 Ways To Split Income

  1. Lend Your Spouse Money – The higher income spouse lends the lower income spouse funds and takes back a note with an interest rate at the CRA’s prescribed rate. The lower income spouse invests the funds and will pay tax on the investment income as long as he or she actually pays the other spouse the interest within 30 days of the end of the tax year.
  2. Spousal RRSPs – The higher income spouse can contribute to the lower income spouse’s RRSP. The goal is to ensure both RRSPs are equal value and at retirement, the income streams will be the same.

Be aware that if the lower income spouse withdraws from the spousal RRSP contributions made by the other spouse will be taxed in the other spouses’ hands if made within the two prior years.

  1. Asset Shifting – This technique is simply swapping assets between spouses. If one spouse owns an asset that does not generate income (such as a cottage), that asset may be swapped for an income producing asset of equal value owned by the other spouse.
  2. Pay Household Expenses – In this scenario, the higher income spouse pays all of the household expenses, including the taxes of the lower income spouse. This technique frees up the lower income spouse’s income available for investmenting
  3. Gifting – As mentioned above, a gift to a spouse will mean that income will be taxed attributed back to the gifting spouse. However, when the initial income received is subsequently invested, there is no attribution on this secondary income.

Other income splitting strategies that utilize testamentary trusts or businesses may be also used. And if you are interested in these other methods, you should seek professional advice.

Your Thoughts Or Questions?

If you have something to contribute or have a comment on this article, please feel free to leave a comment below.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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petros October 5, 2009 at 10:55 pm

Thanks very much for this post and for your website, which I will make a note of in my booksmarks.

Despite the recession, I’ve done very well in my direct trading account. In the last couple of years, I’ve been keeping more or less strict paper trails to show that my income is what I am investing in my investment account. But if we are audited (and my spouse makes much more than I do), I wonder if it would suffice to argue the following: (1) My accrued net income over the last ten years exceeds the current book value of my investment portfolio (if you count also some regular gifts at Xmas and b-day from my US based dad, ca. $4000 per year); (2) my wife’s salary pays all expenses. Will CRA expect that these strict paper trails prove that I invested only my own income? The fact is that we have a joint accounts into which both our pay cheques and savings go and the things get fairly tangled up in the process.

When does the CRA start to care about attribution? Are they going to attack a couple if the principle invested is, let’s say, under $100,000? I wasn’t worried until this year when my portfolio is doing better and I am worried that it may attract attention. I worry that CRA may come ringing at our door saying, how is it that you have a net investments so high, when your earned income is only around 21K? And then I will have to prove that every penny of the principle came out of my pocket.

For me the issues is also related to cash flow. For the first few years of the last decade, we devoted all our resources towards our mortgage until it was completely paid off. I’ve talked to an accountant who says I have nothing to worry about, but then he tends to more much more relaxed than my wife’s accountant. I read widely in investing and often come across warnings about attribution, and I start going nuts again.

Finally, is it really the case that my wife can pay my income taxes? If so, then that gives a fair bit of breathing room. If that’s the case, then I should be investing my gross income and not my net (I have been trying to stick with the net thus far).

Tax Guy October 6, 2009 at 8:59 am

@ Petros:

A couple of thoughts:

First, the CRA looks at auditing from a risk approach. The higher the probability of a taxpayer taking advantage, the higher the probability the taxpayer will be audited. This means that the self-employed and those with employment expenses are more likely to be audited than someone getting only T4 income.

Second, the Income Tax Act requires that every taxpayer account for every dollar earned and the investment income thereof! This means that everyone is required to account for each dollar brought to the marriage and earned in the marriage.

From a tactical point of view, brokerage accounts should be held joint only for estate planning purposes and no other reason. Thus, I always suggest that the husband maintain his own brokerage account and make his wife joint owner and vice-versa. Funds from each spouse should not be co-mingled.

Some Thoughts On Record keeping And Strategy

1. From a record keeping point of view and a tax audit trail, it would be cleaner if each of you received paycheques into individual bank accounts and then funded your joint bank account and brokerage accounts from the individual accounts. However, the reality is that few people do this.

2. The higher income spouse should pay all of the family expenses including the income tax bill of the lower income spouse. The lower income spouse then invests the bulk of their funds and the higher income spouse invests less. The goal here is to attempt to ensure the taxable incomes of both spouses are equal.

petros October 6, 2009 at 3:39 pm

Thanks for the advice. We don’t have separate chequing accounts and I think that is a good a suggestion moving forward. We do keep our brokerage accounts completely separate.

My accountant says his brother works for CRA and they only go after the big fish. I wonder, because my total income, including investments is still small (under 40K), whether CRA would even be interested in auditing my investment income and paper trails. They might find a few discrepancies but it wouldn’t net them very much in the end. But since I’m hoping to earn more through investing in the future, I will probably take your advice about keeping separate bank accounts for our pay cheques.

Tax Guy October 6, 2009 at 7:16 pm

@ Petros:

I agree the CRA goes after big fish but I always feel its best to be safe than sorry.

petros October 7, 2009 at 3:37 pm

Thanks again: did you see this article at In my view it makes a farce of the attribution law; if you can gift money and assets to a stranger, than I should divorce my wife and renounce my children so that they are at arms length.

A former Montreal stripper has won her case against the Canada Revenue Agency, convincing a Tax Court that nearly $2 million from a client was a gift and so couldn’t be taxed.

With Thursday’s decision, Martine Landry won the first round of her battle to keep all of the $1.3 million in cash, two cars, a bar, a house, furs and jewels — a total value of $2 million — she received from a businessman she knew for 11 years.

The cash and items were given to her over a period of five years.

The Canada Revenue Agency and Revenue Quebec viewed the sums as income so they each sent Landry income tax bills for $400,000 and $643,000 respectively.

Tax Court of Canada Judge Robert Hogan on Thursday agreed with Landry that the sums were gifts and therefore not taxable under federal law.

Her case against Revenue Quebec is still before the Quebec court.

Hogan said the relationship between Landry and the businessman developed to the point where they were like father and daughter and Canada Revenue Agency was wrong to treat the gifts as income for tax purposes.

Landry’s lawyer said he’s pleased with the ruling, adding that he and Landry hope the decision will influence the decision involving Revenue Quebec.

Tax Guy October 8, 2009 at 12:11 pm

I think divorce and renouncing children would be a drastic step and the associate legal costs and family disruption would make that strategy cost prohibitive. Especially since the divorce would need to be real and permanent (If you move in together and have children, you are considered common law spouses and attribution applies!).

As for the case, I’m not familiar with it but it appears the CRA was arguing that she was really a prostitute, who would be self-employed and therefore earning taxable income.

Barney October 27, 2009 at 1:21 pm

From your opening suggestions for income splitting you indicate that the higher income spouse can gift funds for the lower income spouse to contribute to their own TFSA. And that on withdrawal these funds and any growth belong to the lower income spouse with no attribution.

Can the lower income spouse then take these funds and invest them with no worries about attribution? It sounds like I could give my wife $5000 today to put in her TFSA and she could withdraw it before year end and put that money into her own non-registered investment account. When January rolls around I can fund the replacement of the $5000 plus another $5000, which she could then repeat the process. In a matter of a couple short months my wife now has about $15,000 in her investment account with no attribution.

Are there rules that disallow this? Thanks.

Tax Guy October 27, 2009 at 2:37 pm

@ Barney,

The wording in the literature speaks to attribution not applying as long as it is in the TFSA. It would appear that the Act allows the income to grow tax-free but once it is withdrawn it may be subject to attribution again.

The problem is that the legislation is so new and there are very few interpretation letters available from the CRA on the account. None ask this question.

petros November 17, 2009 at 3:55 pm

I spoke with my lawyer last night and he affirmed your advice to set up a new account which I did today. Since I’m really just starting out right now and I’m not paying very much tax, if I get things going the right now, I can avoid problems in the future. He said it is very problematic because of LILO (last in last out) or FIFO (first in first out) to have our pay cheques going into the same account. These are cash flow issues; and apparently CRA can be quite the sticklers when it comes to this. But then the question comes to mind: if the one spouse can pay all household expenses including the tax, how is this supposed to be done when the tax is withheld and I never see it in the first place. Can my spouse then pay me back for the tax I paid in withholdings? My lawyer gave me the impression that that CRA wouldn’t like that. Thanks again for your website.

Tax Guy November 18, 2009 at 11:46 am

@ Petros:

Why not use 2 joint chequing accounts? My wife and I do. My pay goes into one hers goes to the other: We both have access to the accounts. There is no question whose money is in what account – If you use PC Financial there are no fees.

petros November 18, 2009 at 12:54 pm

Thanks for the tip; I’ve solved the problem by opening a new account. My question, however, regarded the information that you provide in your post about the higher earning spouse paying the taxes of the lower earning spouse. But if the tax is withheld, then there is no cash flow to prove that its the lower earning spouse’s money. I was asking if you know whether the higher earner can “pay back” the lower earner.

Tax Guy November 18, 2009 at 3:43 pm

@ Petros:

It sounds like you are over thinking this stuff. Realistically, if you both make less than $41,000 a year then this stuff makes little of any difference and the amount of effort versus the reward is negligible – At the very high end of the range, you might be able to save a couple of hundred dollars a year.

Where one makes substantially more than the other (i.e. one spouse makes $30,000 [pays 21% tax] and the other makes $150,000 [pays 45% tax]) then income splitting becomes attractive.

ryan December 3, 2009 at 2:38 pm

Can I gift money to my spouse to pay back student/consumer loans, so she can invest instead of focusing on paying back her debt?
What about investment loans? (I assume this would be too easy)

Tax Guy December 3, 2009 at 7:57 pm

@ Ryan:

If your spouse used the gift to pay off her own debt and then used the funds previously used to service debt for investment, then the investment income would be taxed in her hands.

You cannot guarantee investment loans for your wife and avoid attribution. You can lend funds to her at the CRA’s prescribed rate. As long as she actually pays you the interest by January 30th from her own funds, then the investment income is taxed in her hands…The interest she pays you is a deduction for her and you must include it in your income.

Corey February 20, 2010 at 1:52 am

Hi, my father has declared money under my name for which I have received a t4a from his company. I have never actually had any money deposited into my accounts however. Does this type of action fall under income splitting, or is this simply hiding money from the governmet? Please let me know

Tax Guy February 21, 2010 at 11:47 pm

@Cory – A business may employ family members as long as they actually do the work and are paid the market rate for the work. It may be possible that the funds are being diverted to a trust in which you are the beneficiary. If so, then this would be a reasonable set up.

miller February 23, 2010 at 12:39 pm

hi, can we split the income between spouses and lower the taxes. If the anuual income of one is $80,000 and the other is zero, can we split 40k each so that we pay lower taxes..

Or please suggest other options.

Much appreciated. Thanks

Tax Guy February 23, 2010 at 12:46 pm

@Miller: The article mentions some of the ways income can be split but unless you receive pension income eligible for the pension income tax credit, you can’t just allocate your income to your spouse.

Take a loot at

Melissa July 12, 2010 at 8:56 am


I have a question about investment income. In my family I have two adult daughters all living under the same roof, where one is the lowest income earner in the family. Could I, my husband, and my other daughter who earns a higher salary, lend money to the lower income daughter for investment? Who would be taxed for the income earned from this investment (of course assuming all our other incomes have been subjected to normal income tax rates)? Would it be different if the money was gifted? If you could direct me to any resources with respect to this, I would greatly appreciate it! Thanks!

Tax Guy July 13, 2010 at 11:02 am

Hi Melissa,

A person can loan funds to anyone and to ensure there is an enforceable contract, there should be interest. The lender reports the interest as income while the borrower reports the income earned on the investment as income. The loans should have at least the prescribed rate or a commercial rate of interest.

I will note that you should run the numbers. Typically, small amounts have little if any benefit. To be beneficial the loans must be long-term and the amounts substantial (several hundereds of thousands) to be worth the effort.

Adam February 15, 2011 at 8:49 pm


My spouse and I invested together into some stocks in 2009, but the way we did this may not have been the smartest. The trading account is in my name and my spouse essentially gave me 50% of the purchase price of the shares. I used that money and 50% of my own money to purchase certain stocks which did very well for us. I sold the shares in 2010.

I can on the tax forms set out that each of us bought 50% of the shares (essentially by splitting the total number of shares among the two of us), but there is no formal agreement outside of an oral agreement to jointly contribute the money into the stocks and to split the profits, if any. It would be much better for us if she could show the profit as hers on 50% of the shares as the capital gains push me into the next tax bracket if fully attributed to me.

If we proceed on that basis will the CRA have a problem with this? It would be hard to prove in an audit except for showing bank transfers.


Tax Guy February 16, 2011 at 4:53 pm

The CRA would consider the facts and look at where the sources of the funds came from. They can trace the actual proportion, although only in an audit.

I would normally suggest using two separate accounts just to make things clean and you can just move her share to her account and yours to your account.

Beyond that I would just ensure you properly report the income on your tax returns.

gerry February 17, 2011 at 9:56 pm

My normal income is around 50000 I received a starting bonus of 17000 I paid 13000 in income tax If I don’t add the bonus I can get close to 9000 back in taxes after all is figured out. If I add the bonus it basicly takes 7500 out of my refund away I am trying to figure out what to do. Any ideas on what to do.I cannot split income with my wife just have a regular T4

Tax Guy February 18, 2011 at 1:36 pm

There is little you can do about the bonus other than contribute it to an RRSP or spousal RRSP and deduct the bonus. Of course you should have contribution room available.

Steve Carapiet February 7, 2012 at 8:39 am

I am withdrawing from a LIFF is that splitable with my spouse?

Tax Guy February 7, 2012 at 11:01 am

Provided you are age 65 or older and it meets the requirements, then yes.

Steve Carapiet February 21, 2012 at 10:19 am

Drats! 2 yrs to go then! 🙂

Ray March 18, 2012 at 1:26 pm

My wife claims on line 144 Workers’ compensation and receives CPP pension. Can I split my income with he. Where in the forms does it cover it.

Tax Guy March 18, 2012 at 11:30 pm

Ray. Generally CPP can be split but it’s through CPP and not on the tax return!

Bharat July 8, 2012 at 12:49 am

What about foreign interest income? My spouse and I have a separate bank accounts and receive interest income from both. They are NOT joint accounts. I am planning to apply for tax returns. Can we split our interest income and apply for tax returns? It would save us lot of money.

Retiredguy January 15, 2013 at 1:28 pm

Except from your Oct 6 2009 post……..”From a tactical point of view, brokerage accounts should be held joint only for estate planning purposes and no other reason. Thus, I always suggest that the husband maintain his own brokerage account and make his wife joint owner and vice-versa. Funds from each spouse should not be co-mingle”

My wife and I have separate brokerage accounts. I’m quite familar with Joint with right of survivourship. Is this what you recccomend – JWROS. Legally Does this not make us each, owner of both accounts . Good for estate planning but how is the ITax issue dealt with and what are CRA’s views on us continuing to attribute the accounts income (dividends/Cap Gains) solely to the original person on the account.

Tax Guy - Burlington Accountant January 15, 2013 at 2:00 pm

You would continue maintain separate brokerage accounts and report the taxes exactly as you do now. The only change is that they are each joint accounts!

Retiredguy January 15, 2013 at 2:41 pm

Assuming JWROS on both accounts……. after the death of either one of us the other then owns the deceased’s account and assumes the adjusted cost base of the account.

After the death of one would you then reccomend commingling the 2 accounts into one as a matter of house keeping or is there reason for the survivour to continue to maintain two accounts.
………..I endeavour to keep things simple!

Thank you

Tax Guy - Burlington Accountant January 15, 2013 at 2:43 pm

There is no reason to maintain two accounts, but make sure the survivor captures the cost of assets in both accounts as the broker will likely not keep proper account on your statements.

Jimmy March 11, 2013 at 1:22 pm

My wife and I sold our principal residence, which we owned free and clear, and put the funds into a joint non-registered GIC. As I understand the rules, the interest paid on that GIC is to be proportioned on the basis of how much I contributed to the mortgage and how much she did. That will be quite a task to figure out! This is an issue because I am the sole earner and she is unemployed, and has been for a few years. How do we divvy up the interest?

Tax Guy - Burlington Accountant March 11, 2013 at 4:40 pm


That’s a tough one. I’d suggest thinking through the period of ownership and come up with some sort of weighted average of your income to your wife and use that.

Worst case scenario is that the CRA will ask you to prove it but chances are they won’t anyway but if they do, you can say you used a reasonable method of estimating what it would have been.

Retiredguy March 11, 2013 at 4:37 pm

I am not an expert and I say ,respectfully, that I think you are over thinking things. The money from your home is joint money from a principal residence. Couples can only have one principal residence, not one each. No capital gains was payable on the proceeds and you could not deduct the interest paid on your mortgage. For the purpose of a man wife jointly owned home I don’t believe CRA cares who made the mortgage payment and splitting the proceeds won’t attract their attention.

Now that you are collecting taxable interest on the money I suggest you have 2 GIC’s one for each of you with the other as JWROS.

Tax Guy - Burlington Accountant March 11, 2013 at 4:42 pm

He has it right on the money. However, in practice its nearly impossible to calculate.

Use a reasonable method to allocate and move on. The CRA will likely not audit it but if they do choose to review, then a reasonable estimate should make them happy.

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