Keep more of your money by Income Splitting

Keep more of your money by Income Splitting

Earning more than your spouse can create a situation where moving some of your income can reduce your combined taxes. Consider using these methods

Split Pension Income

With pension income, you and your spouse can split a maximum of 50%. Pension income can include a company pension plan, life annuity, RRSP or a RRIF

When filing both returns, you only need to complete a Joint Election to Split Pension Income form. The higher earner deducts some pension income and includes it in their spouse’s lower tax bracket income. 

A Spousal RRSP

If you calculate that one spouse’s retirement income will be significantly lower than the other’s, you can consider a spousal RRSP. This can level out your taxable retirement income. Still, it will be necessary to plan and project your anticipated retirement income from all sources such as the CPP or QPP, OAS, employer plans and withdrawals from an RRSP or RRIF.

A Spousal Loan

You should never just give money to the lower-income partner to invest, as the CRA views this as a way to sidestep taxes. The government would tax the higher earner despite their spouse owning the investment. To stay onside with the CRA, you need to loan the money to the lower-income partner. The lower-income spouse can invest the loan, provided interest is charged at the CRA’s prescribed rate. The loan must also be repaid.

A TFSA

As discussed previously, a TFSA is an excellent tool for building wealth tax-free. Rules allow a higher-income partner to give a lower-income spouse funds to contribute. Note the importance of transferring the money to the spouse as you cannot contribute directly to your partner’s TFSA. The designation of income back to the contributor doesn’t apply, as it does with spousal loans.