Income Splitting Isn’t Just for Seniors – Strategies That Help Today’s Families
Think income splitting is only for retirees? Think again. There are several strategies—beyond pension splitting—that can lower your family's tax bill today.
Pension Income Splitting (Age 65+)
As a retiree, you can allocate up to 50% of eligible pension and RRIF income to your spouse, reducing your combined tax. You both must file a joint election via Form T1032 each year. This strategy also helps manage OAS clawback and maximizes pension credits.
Attribution Rules & Lending to Spouses
Normal attribution rules mean if you loan or gift money to your spouse without interest, income (like interest or dividends) is taxed back to you. However, using a prescribed-rate loan (at or above CRA's prescribed rate) and paying interest by year-end avoids this. That loaned money can then be used by your spouse to earn income taxed at a lower bracket.
Spousal RRSP Contributions
Higher earners can contribute to a spousal RRSP, giving a deduction now but taxing withdrawals in the spouse’s hands later—often at a lower rate. Watch out: withdrawals within 3 years can be attributed back—but after that, the income belongs to the annuitant. “RRIF income” conversion after 65 can bypass this attribution entirely.
Family Trusts & Private Corporations
By lending money to a family trust or capitalizing a private corporation in your spouse’s or adult child’s name, income/dividends can be earned at lower personal tax rates. Just be cautious of TOSI (Tax on Split Income) rules for minors or non-active adults.
Small Business Owner Strategies
If your spouse works for your business, paying them a reasonable salary creates RRSP room and income splitting. If they hold corporate shares, you can distribute dividends—again, watch TOSI rules for age and active involvement.
Bottom Line
Income splitting is versatile and valuable, no matter your age. Whether through pension splitting, spousal RRSPs, prescribed rate loans, trusts, or smart owner strategies, you can reduce your family's tax burden—legally and effectively. Want to explore which strategies match your situation? I’m here to help GTA families navigate the details.
