Income Splitting for Tax Savings 

Income splitting is a strategic method to reduce overall household tax liability, particularly effective when there’s a significant income disparity between spouses. This approach involves transferring a portion of income from the higher-earning spouse to the lower-earning one, who is likely in a lower tax bracket, thereby decreasing the total tax payable. 

Illustrative Example of Income Splitting: 

• Scenario 1 (Without Income Splitting): 
• Your Income: $150,000; Spouse’s Income: $0 
• Taxes Paid: $44,641 
• After-tax Income: $105,359 
• Scenario 2 (With Income Splitting): 
• Your Income: $100,000; Spouse’s Income: $50,000 
• Taxes Paid: $30,415 
• After-tax Income: $119,585 

In this example, income splitting results in $14,226 less in taxes on a $150,000 income. 

Four Methods to Implement Income Splitting: 

Pension Income Splitting: 

• Eligible pension income can be split up to 50% between spouses. This includes income from company pension plans, life annuities, RRSPs, and RRIFs (for those over 65). This is done by completing the Joint Election to Split Pension Income form during tax filing. 

Spousal Registered Retirement Savings Plan (RRSP): 

• The higher-income spouse contributes to the lower-income spouse’s RRSP and claims the tax deduction. This helps to balance taxable income during retirement. However, if funds are withdrawn within three years of contribution, the contributing spouse faces taxation. 

Spousal Loan: 

• A higher-income spouse can lend money to the lower-income spouse for investment purposes. The loan must carry interest at the CRA’s prescribed rate and be repaid. The interest must be paid annually, and the lender pays tax on this interest. This method avoids the higher tax rate on investment growth. 

Tax-Free Savings Accounts (TFSAs): 

• A higher-income spouse can give money to the lower-income spouse to contribute to their TFSA. Investment income earned in a TFSA is tax-free, and there’s no attribution of income back to the giver, unlike with spousal loans.