Simply put

Four easy ways to income split

By Brenda Spiering, Editor,

Comments (10)

Sure, you love your spouse, but there’s another reason to love being in a relationship. It’s called income splitting. I’ll admit the term doesn’t sound romantic, but when you consider how much money it can save you on income tax, it may begin to look that way.

Four easy ways to income split

How does it work? It’s based on the way we pay income tax — at an increasingly higher rate the more money we make. Financial expert, Jim Yih, of the Retire Happy blog, explains: “An individual who makes $70,000 per year pays considerably more tax than a couple who earn $35,000 each.” Income splitting is simply the strategy of shifting income from the higher-earning spouse to the lower-earning spouse to save on taxes.

While Canadian couples can’t actually pool their incomes and file a single, joint return as U.S. couples can, there are four easy ways that married or common-law couples in Canada can income split:

1. Spousal RRSPs

This is perfect for relationships where one spouse earns more than the other. As RRSP contributions are based on a percentage of earned income, the spouse earning more can contribute more to an RRSP each year than the spouse earning less. This could result in that spouse having a higher retirement income. However, if the higher-earning spouse was to contribute a portion of his or her allowable annual contribution into a spousal RRSP, it would enable the couple’s retirement savings to build up more equally — and their more evenly distributed retirement income to be taxed at a lower rate.

2. Tax-free savings accounts (TFSAs)

Another fantastic income splitting tool. While there’s no such thing as a spousal TFSA, you’re allowed to give money to your spouse to contribute to a TFSA in his or her own name. You won’t get the same tax deduction as you do with a spousal RRSP, but the income earned on money invested in a TFSA is tax-free. Ensuring you both contribute the maximum annual allowable contribution ($5,500 as of 2013) is another great way to boost your overall savings.

3. Make your spouse a business partner

Do you run an incorporated business? Make your spouse a business partner and share the profits. Of course, he or she needs to do real work or contribute to the business somehow. But, provided this is the case, your spouse’s salary will be deductible from your corporate taxes — thus further reducing your tax bill and leaving money in your pocket.

4. Pension income splitting

Even if you’re not working anymore, you can enjoy the benefits of income splitting. You can elect to allocate up to half of your pension income to your spouse. Again, this can help lessen your tax burden and reduce the overall amount of combined tax you pay as a couple.

To find out more about these income splitting options and whether they may be right for your particular situation, it’s wise to consult a tax professional.

To learn more about the advantages of RRSPs and TFSAs, read: Where to stash your cash: RRSP or TFSA?

Looking for more financial guidance to help make smart financial decisions? Check out the following handy tools and calculators:
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joy on

If my husband run an incorporated business in 2013 and wants to make me, his spouse, a business partner and share the profits (income split), how does he have to declare to Corporations Canada?

Chance Callan on

I too have tried to simplify accounts. We have numerous credit cards with zero balances (with no annual fees) that are tucked away so we only have one credit card for monthly use (mainly to collect those travel points!). We each have RSP accounts but the investments inside those accounts are laddered so they mature in different years, providing regular opportunities to cash or reinvest depending on our circumstances. We each have a rolling RRSP account that rolls over automatically each year which is slated for eventual RRIF and long term financial needs. We both have our TFSA accounts and again, the investments are laddered. We also have some GIC’s that are laddered and we play around with them at maturity taking the funds to the highest interest rate available and the rates determine the term of the GIC. My husband and I have been together 14 years. When we met, we were both renters, heavily in debt due to life circumstances and bad decisions. Now we are debt free, mortgage free and are working hard to build retirement funds. It is slow but we’ll get there!

Moira Vermeer on

Who was this written by? Not a single one of my married friends will ever receive a worker’s pension, so this isn’t an “opportunity” for the majority of us Canadians. You are dreaming if you think the incredibly low limit of $5,500 yearly for the TFSA will be enough to significantly help one’s yearly economic costs (won’t even cover the cost of a year’s groceries in Canada let alone be able to enable one to remain in one’s own home as one ages).
Canadians remain one of the most highly taxed people in the world with the least personal benefit to show for it.
We can’t deduct mortgage payments like the majority of countries, we CANNOT split our income with our stay-at-home spouse who is WORKING at raising a family.
Time to take the blinders off. My senior neighbour gets a discounted bus pass — although do you know that the latest economic survey by Stats Canada revealed that Canadian seniors are the least likely group to require welfare assistance?
The cold economic reality is that Canada is going to be a very hard place for many of us who are under 40 to retire in.

joemanhas on

I thought income splitting was about bring home a cheque and giving it the the wife, and if your nice she’ll give half (if your lucky)

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