The income tax you pay is based on a set of progressive tax rates. This means that the amount of income tax you pay increases as your taxable income increases. For example, in 2009 you would pay federal income tax of:
- 15% on the first $40,726 of income you earn,
- 22% on the next $40,726,
- 26% on the next $44,812, and
- 29% on any taxable income over $126,264.
In addition to the federal income tax, each province in Canada charges progressive tax rates. Therefore, Canadians are motivated to lower their overall income tax payable by splitting income with family members.
Income splitting is a strategy of shifting income from a higher income earner to a lower income earner in order to reduce the overall tax paid by the family.
Limits To Income Splitting
The government needs tax revenue and has limited many of the income splitting opportunities. However, some income splitting opportunities still exist that will allow you to split income with your spouse or other family members.
Some Income Splitting Is Encouraged!
While many of the income splitting opportunities can be somewhat complicated, the government has specifically allowed Canadians to income split in three ways:
- Spousal RRSP’s – Spousal RRSP’s allow one spouse to contribute to the other spouses’ RRSP. This allows the higher income spouse to lower their income now and then use the spousal RRSP to even the income earned in retirement.
- Pension Income Splitting – For those who receive a pension income, you can split pension income with your spouse.
- TFSA’s – Money you give to your spouse that is put in their TFSA is exempt from the income splitting rules.
If you want to learn more about other income splitting opportunities, look at my article on income splitting opportunities. You should read my article on the right way and wrong way to split income.
Questions About Income Splitting?
Do you have a question about income splitting? Have you tried to split income and ran into trouble with the CRA? Ask your question or share your experience by leaving a comment.
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Just a caution on Pension Splitting!
If a spouse is in a nursing home and their fees are supplemented by the Ontario Government, their rent could be increased because the Pension Splitting has increased their Net Income which is the basis for calculating the supplement!
One of my clients had to repay over $3,000 as the rent increase was more than the tax saving!
Yes. Be aware that splitting income with your spouse using the pension splitting rules may have some unintended consequences. The CRA addresses this issue on their website.
I work and make about $76000.00 my husband is retired and makes about $35000.00 can we income split while i am still working?
@Dawn – I have edited out your last name form the post.
If your income is employment income, there really little you can do to split income on your employment income. You can save taxes by having your spouse do the investing with his money. In this scenario, you pay all of the bills, including his income tax and he invests his money. All investment income is then taxed in his hands.
I am a sole proprietor working as a carpenter. Is there a way to transfer some of my income to my sons. They are under 18 and live at home. They do not actually work on site with me but I was wondering if I could make them partners in my business and then claim some of my income on their returns. As non working partners I would not have to carry wcb coverage for them? Just looking for a way to reduce my taxable income
@ Rick: If they worked in the business, you could pay them a salary. Otherwise you may be able to incorporate your business and make your children shareholders. Speak with an accountant before doing so to ensure the structure is appropriate.