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’s – Spousal 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.