How Canadian Couples Can Legally Split Income and Reduce Taxes

Many Canadian couples don’t make the same amount of money. Often, one person brings in 60% or 70% of the household income, while the other makes less. In these cases, it helps to keep both partners’ retirement investments roughly equal. Doing this can save the family a lot of money on taxes during retirement.

Canadians have several legal ways to transfer or split income between spouses or common-law partners, both during their working years and in retirement.

1. Give money to your spouse or common-law partner to invest in their TFSA.
2. The higher-earning spouse pays most or all household expenses, allowing the lower-earning spouse to invest more of their own income.
3. Lend money to your spouse or common-law partner at the CRA’s prescribed interest rate.
4. The higher-earning spouse contributes to a Spousal RRSP in the name of the lower-earning spouse or common-law partner. The contributor receives the same RRSP tax deduction as if they had contributed to their own RRSP. This effectively shifts retirement savings to the lower-income spouse. After the required three-calendar-year attribution period, withdrawals are generally taxed in the lower-income spouse’s hands rather than the contributor’s.
5. Split up to 50% of eligible pension income, including payments from an RRIF, LIF, or RRSP annuity.
6. A spouse who receives a larger CPP retirement pension may be able to share part of it with their spouse through CPP pension sharing.

Which strategies you use will depend on your financial situation, the income gap between partners, and your retirement timeline. In many cases, using a combination of these approaches can be the most effective.

Have you used any of these strategies, or are there other Canadian income-splitting approaches you would add?

For more details, see:

1. Income Splitting for Canadians
2. Spousal RRSP for Income Splitting
3. Pension Income Splitting

Disclaimer: This article is for educational purposes only and does not constitute financial or tax advice. Please consult a qualified professional before making any decisions.