4 easy ways to split income in Canada
Income splitting isn’t as confusing as it sounds. When you do it correctly, the strategy can help reduce how much you and your spouse or common-law partner pay at tax time.
What is income splitting? It’s when a high-earning spouse or common-law partner transfers part of their income to their lower-earning partner. In some cases, this moves the high-earning spouse into a lower tax bracket – allowing them to save money at tax time.
However, there are some rules attached to the strategy (as outlined in the Income Tax Act). Below, we’ve included some of the ways couples can split income. Speak with your tax advisors to see which of them could work for you.
How do I split income in Canada?
Canadian couples can’t pool their incomes and file a single, joint tax return like couples in the United States. But there are four techniques that Canadian couples can use to split income.
1. Pension income splitting
Even if you’re not working anymore, you can enjoy the benefits of income splitting. If you’re earning more “pension income” than your spouse or common law partner, and have reached or will reach age 65 during the year, you both can jointly elect to allocate up to half of your pension income to your lower earning spouse or common law partner. “Pension income” includes defined benefit pension income, income from an RRSP or RRIF, and other types of income. Speak with your tax advisor for details. Pension income splitting can help lessen your tax burden, reduce the combined amount of tax you pay as a couple, and restore some or all of your entitlement to Old Age Security payments if those payments would otherwise be clawed back.
2. Contribute to your spouse or common law partner’s spousal RRSP
This strategy works well if you earn more than your spouse or common law partner (or vice versa). RRSP contribution room is based on a percentage of earned income. This means the higher-earning spouse can contribute more to an RRSP each year than the lower-earning spouse. Let’s say the higher-earning spouse was to contribute a portion of their allowable annual contribution to their spouse’s spousal RRSP. This would allow both their retirement savings to accumulate more equitably, and lead to them both having more equal and less heavily taxed incomes in retirement.
3. Income-splitting for business owners
Do you run an incorporated business? Give your spouse and/or children a job in your business and pay them a reasonable salary for the work they do. Of course, they need to do real work or contribute to the business somehow. If they do, their salaries will be deductible from your corporation’s income, and will be taxed to them at their marginal rates. This can let you reduce the amount of income you take from your business and reduce your tax bill, leaving more money in your pocket. If you’re thinking about giving your spouse and/or children shares in your business, speak first with a tax advisor. The rules are complicated.
4. Max out your spouse's TFSA
There’s no such thing as a spousal TFSA. But you can give money to your spouse to contribute to a TFSA in their own name. Keep in mind, you won’t get a tax deduction as you would with a spousal RRSP.
However, the income earned on money invested in a TFSA is tax-free. Ensure you both contribute the maximum annual allowable contribution each year ($7,000 as of 2024). It’s another great way to boost your overall savings.
Income splitting frequently asked questions
Who is eligible for income splitting in retirement?
Couples who want to split income in retirement must reside in Canada by the end of the calendar (tax) year. The only exception is if they work or attend school outside of the country.
How does income splitting work for seniors in Canada?
Within Canada, seniors (anyone over 65) can transfer up to 50% of their eligible pension income to their spouse or common-law partner. To do this, both spouses must complete and sign a joint Form T1032 and submit it to the Canada Revenue Agency with their tax returns at tax time. Only one transfer can happen each year.
Do both spouses need to be 65 to income split?
No. For most types of pension income, only the spouse transferring the income needs to be 65 during the year. The recipient spouse can be under 65. If the transferring spouse is under 65 during the tax year, they can split income only from their defined benefit registered pension plan. If they’re 65 or older during the year, they can split more kinds of pension income.
Are you on track to retire? To help you know, take some time to complete our Retirement Savings Calculator. You can also talk to your advisor.
This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.
