Understanding Income Splitting

The income tax you pay is based on a set of progressive tax rates. This means that the amount of income tax you pay increases as your taxable income increases. For example, in 2012 you would pay federal income tax of:

  • 15% on the first $42,707 of income you earn,
  • 22% on the next $42,707,
  • 26% on the next $46,992, and
  • 29% on any taxable income over $132,406.

In addition to the federal income tax, each province in Canada charges progressive tax rates. Therefore, Canadians are motivated to lower their overall income tax payable by splitting income with family members.

Income splitting is a strategy of shifting income from a higher income earner to a lower income earner in order to reduce the overall tax paid by the family.

Limits To Income Splitting

Since the government needs its tax revenue, it has limited many of the income splitting opportunities. However, some income splitting opportunities still exist that will allow you to split income with your spouse or other family members.

Some Income Splitting Is Encouraged!

While many of the income splitting opportunities can be somewhat complicated, the government has specifically allowed Canadians to income split in three ways:

  • Spousal RRSP’sSpousal RRSP’s allow one spouse to contribute to the other spouses’ RRSP. This allows the higher income spouse to lower their income now and then use the spousal RRSP to even the income earned in retirement.
  • Pension Income Splitting – For those who receive a pension income, you can split pension income with your spouse.
  • TFSA’s – Money you give to your spouse that is put in their TFSA is exempt from the income splitting rules.

Looking For Professional Help?

There are a number of income splitting techniques that can be employed by business owners and seniors.

Call us at (289) 288-1206  or email us to arrange an appointment to have us review your tax situation and look for opportunities to reduce your family tax bill.

Dean Paley

A graduate of Simon Fraser University, Dean started and operated an independent painting company while perusing a degree at SFU. After graduating from Simon Fraser, Dean entered the Certified General Accountants Program of Professional studies where he obtained the professional CGA designation. After a number of successful years as the head of finance for the Canadian operations in a global financial services firm, Dean moved into a marketing role and established and launched a tax, estate and financial planning support department and service to advisors and clients. During this time Dean successfully obtained the Certified Financial Planner (CFP) designation. Dean has been a member of the Canadian Forces Reserve spanning three decades serving in the Royal Westminster Regiment (B.C.), the Military Police and later as a commissioned officer in the Cadet Instructors Cadre in Hamilton Ontario. Dean Paley CGA CFP has been interviewed and quoted in major media such as the National Post, Financial Post, Toronto Star, Canadian Business, Money Sense and Investment Executive. Dean is married to his lovely wife Deborah and has four lovely children.