Reduce Your Tax Bill With Income Splitting

By Colin White, March 27, 2019

A great option for reducing the amount of tax you pay is to split your income with lower-earning family members, usually referred to as income splitting. Let’s have a look at some of the most common ways this strategy can be used.

Employer pension

You have the ability to split the income from your employer’s pension plan with your spouse. This is limited to 50% of the amount received, but you can choose a lower amount if necessary. You can change the allocation each year, so this is a very flexible option and you can consider how all other parts of your situation played out for the year before you make this allocation.

RRIF income

Once you have reached age 65, the income you are withdrawing from your RRIF is eligible to be split as well. It is important to note that withdrawals from an RRSP, or RRIF income prior to age 65, is not eligible to be split.

Canada Pension Plan

CPP is eligible to be shared but not split. I know that sounds odd, but here is the difference. You can apply to share your CPP with your spouse and once approved, the pension amounts will be adjusted and paid out accordingly. The amount that is shared is pre-determined based on the number of years you and your spouse have lived together.

You cannot split your CPP with your spouse when you’re filing your return, as you have to report the amount you’ve received. In other words, whereas your employer pension and RRIF income can be split by 0–50% year to year, CPP sharing is done at a pre-determined percentage that’s consistent for every year it is shared. If you have applied to share your CPP benefits, the tax slips will reflect that for reporting on your tax return.

Spousal RRSP

Although spousal RRSPs were much more popular before changes to the Income Tax Act in 2007, many people still have these accounts. The theory was that the higher income spouse could contribute to an RRSP in the name of the lower-income earner. Once two full calendar years have passed from the last contribution, withdrawals are taxed in the hands of the account holder. This is not something that can be done when filing your tax return, as it must be withdrawn from the proper account.

These are just a few points on income splitting you might consider when filing your taxes. If you have any specific questions, consult a qualified tax specialist to ensure you only pay the tax you are required to pay.

This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.