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Smart ways couples can split income and save on income taxes

by Wayne Cheveldayoff, 2006-03-23

The progressive nature of Canada’s income tax system provides couples with several techniques to split income in order to save on taxes – all sanctioned by the rules set out by the Canada Revenue Agency (CRA).

Someone in Ontario with a taxable income of $120,000 pays a marginal tax rate of around 46 per cent on extra income earned, while a person earning $25,000 a year pays a marginal rate of only around 22 per cent.

Obviously, if the extra income can be reported by the lower-income spouse, the couple will save on income taxes.

Here are some income-splitting techniques often cited by tax specialists.

1. The higher-income spouse can pay most or all of the couple’s living expenses while the lower-income spouse invests his or her income. The earnings on these investments will then be taxed in the hands of the lower-income spouse.

2. A higher-income spouse can make RRSP contributions into an RRSP registered in the lower-income spouse’s name. If Spouse A with a 46 per cent marginal tax rate contributes $10,000 into a spousal RRSP, he or she will get a tax refund of $4,600 on that contribution. If Spouse B with a 22-per-cent marginal tax rate later withdraws the $10,000 from the RRSP, the amount of income taxes owing would be $2,200 – a saving of $2,400. This is ideal for couples planning to have one spouse stay at home to look after children. However, for this technique to work, the contribution has to stay in the spousal RRSP for three years. Also, the tax authorities apply a last-in, first-out attribution rule on spousal contributions. It means that Spouse A cannot make any spousal contributions for Spouse B in the three years prior to Spouse B withdrawing the money, or else the withdrawal would be attributed back to Spouse A.

3. CRA allows one spouse to assign up to 50 per cent of Canada Pension Plan (CPP) benefits to the other spouse. This is especially advantageous where one spouse has little or no income.

4. Gifts of money or property between spouses can also save taxes. If Spouse A (higher-income spouse) gives $10,000 to invest to Spouse B, the CRA attribution rules require that Spouse A has to report and pay income tax on any income from that investment. However, over a period of years, Spouse B can accumulate the investment income and invest it as his or her own and would thus be taxed at a lower rate on it. Using this technique, couples can gradually over several years legitimately transfer a significant amount of investment capital into the hands of the lower-income spouse.

5. The rules also permit effective income splitting via lending between spouses but only under certain conditions. If Spouse A lends $10,000 to Spouse B and Spouse B invests it in income trusts paying 10 per cent, Spouse B would have $1,000 of investment income in the first year. This investment income would be taxed in Spouse B’s hands as long as (i) Spouse A charges interest of at least CRA’s prescribed interest rate (currently 3 per cent) on the loan, and (ii) Spouse B pays this interest within 30 days of the end of each year. In this situation, of the $1,000 investment income earned by Spouse B, $300 would be paid in interest to Spouse A, who would report the income. The remaining $700 would be Spouse B’s income to report.

Splitting income in these ways could bring the greatest tax savings if Spouse B earns no other income and therefore has a zero marginal tax rate. But it depends on the circumstances. If Spouse A is claiming the federal spousal tax credit for Spouse B, this could be lost in part if Spouse B earns more than $692, or lost in full if Spouse B earns more than $7,600, during the year. In such a situation, the couple would have to weigh the potential tax savings from splitting income against the loss of the spousal tax credit.

If you are going to use any of these techniques, be sure to have a well-documented paper trail. If you have any doubts about what to do, it may be best to consult a tax specialist.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

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©2006 Wayne Cheveldayoff