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 2010 you would pay federal income tax of:
- 15% on the first $40,970 of income you earn,
- 22% on the next $40,971,
- 26% on the next $45,080, and
- 29% on any taxable income over $127,021.
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. TurboTax has a pension income splitting optimizer to help you decide the right amount.
- TFSA’s - Money you give to your spouse that is put in their TFSA is exempt from the income splitting rules. Questrade offers TFSA trading accounts.
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.
Related Articles
- Canadian Income Splitting Guide
- 12 Income Splitting Opportunities
- Pension Income Splitting For Canadians
- How To Split Pension Income
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hello, I have a question… my wife is employed and i am self-employed but with a limited income. Can we use some of her income earned on salary and apply this income to me, although no funds have been given to me directly?
Thanks,
Ebe
Hi there Ebe,
From the way you have explained it, probably not. But take a look at the income splitting guide.
Hey. I have a question. A couple of people i know run their own businesses and say they income split with their spouse. How is this done? Is this legal? Do you have to have a business to do it? They pay out a portion of their income to stay at home spouses and call it income splitting.
A corporation may be used to separate ownership and or a spouse could be paid a salary.
Hi, my husband and I have our own bank accounts and we did income splitting. He owes money and i get money back. How do we figure out how much he should get fom my refund?
June,
It’s hard for me to say, I’m not sure what income you are attempting to split.
income tax splitting
Myself and my wife file seperately and I’m wondering why is it that when I add my wifes Net income…after the govt. has taken money off of her. my return has dropped significantly.
Stuart,
Let me first clarify that there is no choice in Canada but to file separately! Canada does not allow spouses to “combine” their tax returns or file jointly.
It sounds as if you are using software to complete your tax return and watching the “refund” box while completing the returns is misleading. There are a variety of factors that can adjust the tax owing on both returns and can affect each others returns. For example, if you completed your return first the software will assume your spouse has no income and will add a spousal credit of about $10,000 federally to your return. As soon as you add in your spouses’ income, the credit is reduced or eliminated altogether depending on your spouses’ income.
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