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Updated 2mo ago.
Updated 2mo ago.
Income splitting is a tax strategy that involves transferring or allocating income from a higher-taxed family member to a lower-taxed family member, thereby reducing the household's overall tax burden. In Canada, attribution rules limit this practice, but several legal mechanisms exist, including pension income splitting and the RESP.
Robert (65, income of $80,000) and Diane (65, income of $20,000) are spouses. Robert receives $40,000 from his RRIF. Through pension income splitting (form T1032), he can allocate up to 50% ($20,000) to Diane. Result: Robert declares $60,000 and Diane $40,000. The tax savings can reach $3,000 to $5,000 per year, because the transferred dollars are taxed at Diane's lower marginal rate.
With Canada's progressive tax system, a couple where both spouses earn $50,000 pays much less tax than a couple where one earns $100,000. Income splitting is one of the few legal tools to correct this imbalance. The main strategies are: pension income splitting (age 65+), spousal RRSP, RESP, and prescribed-rate loans between spouses. Be careful with attribution rules that can negate the benefits if applied incorrectly.