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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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.
My wife inherited some money and put it in GIC and T5 is %100 to her name, and we have son in university and we pay all his expenses. is there any way she could splitt this GIC income with him.
Hadi:
If your son is over the age of majority for your province, then you can gift all or a portion to the child. Any income would then be taxed in his hands.
I am self-employed in a high tax bracket and my spouse is a full-time student, with no taxable income. I pay for her studies – can I claim the amount as a (business) expense against my 2009 income and if yes, does this have to be structured as a student loan? Thanks.
My question is similar to Pepe. I am employed at $60K/year and my spouse is a full-time student, with no taxable income. I pay for her studies – can I claim the amount as an expense against my 2009 income and if yes, does this have to be structured as a student loan? Also, can I split my income with her? What are my options?
Hello Dean:
The tuition tax credit may be claimed by your spouse and any unused portion may be transferred to you. Your spouse needs to sign over the credit on form T2202.
I am having great difficulty filing out the form for pesnion income splitting.
I plugged our numbers into ufile and it’s calculation advises pesnion income splitting would be beneficial. However I cannot make sense of the form.
The form T1032 is the pension splitting form. Step 2 is used to caclulate how much of your income you can split. Step 3 asks you how much you want to split and says it cannot be more than the amount is Step 2.
Step 4 is used to figure out what amounts go on whose return. The rest of the form is faily straight forward.
I’m looking at the paper based version. You can see a copy here: http://www.cra-arc.gc.ca/E/pbg/tf/t1032/README.html
I am self employed in one field, but I do some work for my husband in another field on an irregular basis. We would like to split his income – he is the higher income earner. Does he have to pay me a salary and benefits, or could I just invoice him for the actual hours worked? As I mentioned, I am self-employed and any EI he would pay would never allow me to qualify for benefits in any case.
So, in essence, does income splitting assume a salary or not?
He can either pay you a salary or you can invoice him for services. If he pays a salary, he does not have to deduct or remit EI.
A couple of thoughts. You do need to ensure that the remuneration received & paid is reasonable and comparable to what he would pay someone else for the same work (i.e. you should avoid having artificially high rates for the work). Prepare a written document outlining the work that will be done in the form of a job description. Finally, make absolutely certain you document when you worked, for how long and what you did. This does not require extensive notes but rather just a short description (i.e. June 25th – 9am to 1pm – Bookkeeping, invoicing and print financial statements).
I suggest you pick up a paper appointment calendar or small desk calendar and enter the information there. It’s quick easy and you can pick it out of a file if the CRA asks you to substantiate the payments.
When I enter my common law’s income on quick tax all of a sudden my tax refund halfs. I thought filing as common law could only have adverse affects on your GST return. Am I doing something wrong?
Hard to say without seeing it really. If all of the information for you and your spouse is correct, then the software should be correct. If you have not entered all of the info for both of you, then it’s likely the refund will not be correct.
You can try and compare it to Studio Tax’s free tax software.
“TFSA’s – Money you give to your spouse that is put in their TFSA is exempt from the income splitting rules.”
How does this work?
John,
You give your spouse funds and they put them in their TFSA. When they withdraw from the TFSA and invest again, there is no attribution.
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