How to Split Income to Reduce Your Family’s Tax Bill

May 16, 2025
How to Split Income to Reduce Your Family’s Tax Bill

Introduction

Income splitting is a powerful tax strategy that allows families to distribute income among members in lower tax brackets to reduce overall tax liabilities. Canada’s progressive tax system imposes higher rates on higher income levels, making strategic income distribution highly beneficial for tax savings.

 

However, the Tax on Split Income (TOSI) rules introduced in recent years impose restrictions on certain income-splitting strategies. This article explores legal and effective income-splitting methods to reduce a family’s tax burden while remaining compliant with Canadian tax laws.

 

1. Understanding the Canadian Progressive Tax System

  • Canada’s tax system uses graduated tax brackets, meaning that higher income is taxed at higher rates.
  • Example: A taxpayer earning $200,000 pays a higher marginal tax rate than a spouse earning $50,000.
  • Income splitting can lower overall tax liability by shifting income to a lower-tax-bracket family member.

 

2. Legal Methods of Income Splitting

A. Paying Salaries to Family Members

  • Business owners can hire spouses or children and pay reasonable salaries for legitimate work performed.
  • This shifts taxable income from a higher-income taxpayer to a lower-income family member.

B. Pension Income Splitting

  • Retirees can split up to 50% of eligible pension income with their spouse, reducing their family’s overall tax burden.

C. Spousal RRSP Contributions

  • A higher-earning spouse can contribute to a Spousal RRSP, allowing the lower-income spouse to withdraw funds at a lower tax rate in retirement.

D. Transferring Investment Income

  • Transferring assets to a family trust or lower-income spouse can reduce the tax rate applied to investment earnings.

 

3. Restrictions on Income Splitting: Tax on Split Income (TOSI) Rules

  • The TOSI rules prevent income shifting to family members under 18.
  • If income is split without meeting certain business engagement criteria, it may be taxed at the highest marginal rate.

 

Conclusion

Income splitting can provide significant tax savings when structured correctly. 

 

Tax Partners can assist in implementing tax-efficient income-splitting strategies while ensuring compliance with Canadian tax laws.

 

This article is written for educational purposes.

 

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

 

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

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