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Koroll & Company Blog

What You Need To Know About Income Splitting

[fa icon="calendar"] Dec 27, 2021 7:56:52 AM / by Allen Koroll

Income splitting is a useful tax planning strategy that lets you move income from someone in a higher tax bracket to a family member in a lower tax bracket. This helps lower your overall family tax obligation.  

There are attribution rules that prevent Canadians from simply gifting money to spouses to substantially reduce tax owing but there are legitimate ways to give money to your spouse for income splitting purposes that are allowed.  

  1.  Investment income splitting  

If you have investment income, you can split it with your spouse. To do this, you would lend money to your spouse, who is in a lower tax bracket. Your spouse would then invest the money and any dividends earned would then be taxed under your spouse at their lower tax rate.  

There is one major requirement that must be met to split investment income, the loan must be interest bearing.  

The interest rate must match the prescribed rate when the loan was made. This rate is set by the CRA and is currently 1%. In addition, the interest must be paid by January 30 of the following year. If it isn’t, then the dividends will be attributed back to you. If interest is paid on time, the dividends will be attributed to your spouse and the interest they pay will be a deductible.  

  1. Pension income splitting  

Under pension income splitting, Canadians who are 65 or older and married can share up to 50% of their private pension income with their spouse when filing income tax returns. In addition, your spouse will be able to claim the Pension Income Tax Credit of $2,000 when you split income, if they are not currently receiving pension themselves.  

To split pension income, you and your spouse both have to submit form T1032 Joint Election to Split Pension Income. You do not actually have to transfer the funds to your spouse. You’re simply splitting the funds on paper.  

Income that is eligible for splitting generally includes pension from:  

  • Previous employer  
  • RRSP (Registered Retirement Savings Plan)  
  • RRIF (Registered Retirement Income Fund)  

You can not split income from government pension sources such as the Canada Pension Plan (CPP). You also can not split income from Old Age Security (OAS), death benefits, retiring allowances or excess amounts from an RRIF transferred to an RRSP, RRIF or annuity.  

  1. Contributing to a spousal RRSP  

If your spouse will likely have less income in retirement, you can contribute to a spousal RRSP to reduce future family tax burdens (married or common-law). To do this, the spouse with high income would open and contribute to a spousal RRSP for their partner. This will reduce your current year tax bill for the current year, the same way it would if you contributed to your own RRSP.  

When your spouse withdraws the funds from their RRSP, the withdrawal will be taxed in the hands of the spouse, which will hopefully be at a lower rate. But remember, withdrawals of spousal contributions will only be taxed at your spouse's rate if they’re withdrawn no sooner than the end of the second calendar year after the contributions were made (i.e. if you contribute in 2021, you have to wait until at least January 1, 2024 to make the withdrawal).  

A note on splitting income with children 

In the past, if you owned a corporation, you could have minor children subscribe to shares. Dividends earned by these would then be taxed on their income tax returns resulting in little-to-no tax payable. In most situations, the parents would put the dividend income into trusts for the children and then pay for expenses related to school, camp and extra curricula from this trust.  

The problem was that this practice gave taxpayers an unfair advantage, so to stop this, the government introduced the Kiddie Tax or Tax on Income Splitting (TOSI), which is a 33% tax on all income split with eligible minor children. 

To find out more on this tax, read our blog on how Income Splitting Rules Could Affect Tax Planning through Private Corporations

For more information on splitting income, please contact us today.   


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The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.



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Topics: Tax Tips

Allen Koroll

Written by Allen Koroll