Income splitting strategies to consider

January 14, 2026

The start of the new year is traditionally the time people set new personal and financial goals. It also means we will be approaching income tax filing season. Household finances are greatly impacted by taxes with Canadians being subject to progressive tax rates. Progressive tax rates is a tax system where the tax rate increases as taxable income increases. The goal for households is to maximize after-tax income. Having more after-tax income translates to an increase in disposable income that can be used to pay expenses, increase emergency savings, pay down existing debt or allocate additional funds to savings goals. One of the ways for families to reduce income tax is through correctly structured income splitting. Income splitting is a tax planning strategy that allows a higher-earning family member to transfer income to a lower-earning family member. By redistributing income, families can take advantage of lower tax brackets and reduce their overall tax liability.

The first step to effective and legitimate income splitting in Canada is to understand the various methods of income splitting and observe Canada Revenue Agency (CRA) guidelines to guarantee compliance.

CRA attribution rules

One of the key areas of income splitting is understanding attribution rules. Attribution rules are set out by the federal government to prevent individuals from simply transferring a portion of their income or investments to another family member that may be in a lower tax bracket. Simply put, attribution rules require that income arising from the transfer of property be taxed in the hands of the transferor (individual who makes the transfer) and not in the hands of the transferee (individual receiving the transfer). Attribution rules must be followed to prevent the incorrect use of income splitting.

Transfers that result in income attribution to the transferor include:

• Gifting property or selling property under fair market value (FMV) to a spouse will result in investment income/losses and capital gains/losses being attributed back to the giver.
• Gifting property or selling property under FMV to a minor child will result in the income/losses being attributed back to the giver, however capital gains/losses are reportable on the minor child’s income tax.
• When a loan is given to a spouse, or a minor child for the purpose of investing the funds, the lender must charge the recipient the prescribed interest rate*, otherwise in the case of the spouse the income/losses and capital gains/losses are attributed back to the lender and in the case of the minor child the income/losses are attributed back to the lender, however capital gains/losses are reportable on the minor child income tax.
• There is no income or capital gains attribution from gifts to adult children. When the property is gifted, the giver is presumed to have sold the property at FMV and will be responsible for claiming any income or capital gain on their income tax.

*Prescribed rate of interest refers to the minimum rate of interest that must be charged between family members to avoid attribution rules, the rate is set out by CRA quarterly

Income splitting strategies

There are several ways to split income depending on age, income levels and how income is earned; self-employed and earning business income vs working for an employer and earning employment income.

Paying expenses by the higher-income spouse

The easiest and most common strategy is for the higher-income spouse to pay for all household living expenses, therefore allowing the lower-income spouse to accumulate investment assets and earn investment income at a lower tax bracket.

Spousal RRSP

Using a Spousal RRSP is an efficient method to:

• reduce tax liability for the contributor in the year the contribution is made,
• build retirement savings for the RRSP account holder,
• defer taxes owing into retirement when typically, individuals may be in a lower tax rate.

Spousal RRSPs are particularly efficient if spouses wish to retire before age 65 when retirement income is eligible to be split between spouses. It is important to remember that funds withdrawn from a spousal plan in the year of contribution and in either of the two following years will be attributed back to the contributor.

Tax-Free Savings Account (TFSA)

Contributing and saving through a TFSA is another effective way to increase savings for each spouse. The higher-earning spouse may gift money to the lower-earning spouse to contribute to their personal TFSA. The growth earned from qualified investments along with withdrawals remain tax-free. This strategy is not subject to attribution rules.

Income sharing in a family business

If an individual is the sole business owner or partner in a partnership, income may be paid out to a spouse provided that the salary is reasonable and legitimate for the services provided along with being appropriately documented. The salary paid is deductible to the business and taxable to the spouse.

Splitting retirement income

Spouses over the age of 65 can split up to 50% of qualifying pensions. The amount that is transferred will be deducted from the income of the transferor and will be included in the income of the transferee. Both spouses must agree to the allocation in their tax returns. This is completed at the time of income tax filing.

Qualifying pension income includes:

• Registered Retirement Income Fund (RRIF) payments
• Registered Retirement Savings Plan (RRSP) annuity payments
• Certain amounts received under retirement compensation arrangement (RCA)

If under the age of 65:

• Only qualifying pension income primarily from registered pension plan (RPP)

Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) sharing

If both spouses agree, the CPP/QPP retirement pension can be ‘shared’ in a ratio that reflects the time that the spouses lived together while CPP/QPP payments were being made to a maximum of 50% of each spouse’s benefit. If both spouses are eligible for CPP/QPP, then both pensions must be shared. The amount of each spouse’s CPP/QPP remains the same whether it is decided to be shared or not. This is completed through Service Canada.

Income splitting is a powerful strategy that can lower overall income tax obligation within a household which in turn increases after tax, disposable income. Lowering taxable income may increase eligibility for income tested government benefits such as Canada Child Benefit (CCB) and Guaranteed Income Supplement (GIS). It may also reduce Old Age Security (OAS) recovery tax (clawback). Partnering with a knowledgeable and trusted financial advisor and tax specialist will help you to understand income splitting rules and remain compliant while helping maximize taxsavings opportunities.

FirstOntario Credit Union in partnership with Aviso Wealth has an experienced team of advisors specializing in various areas of wealth management including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.

Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc.. The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This should be considered as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds. The views expressed are those of the writer and not necessarily those of Aviso Wealth.