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Income splitting: What still works?

With the introduction of the tax on split income (TOSI) rules in 2018, the government effectively ended many of the methods that Canadians – and business owners in particular – used to split income with their spouse and family members to take advantage of having more income taxed at lower marginal tax rates.

Despite this, there are still ways for families (both middle-class families as well as high net worth) to reallocate assets and related income to lower-income family members to reduce the overall tax burden.

Spousal RRSP

The easiest strategy is for the higher-income spouse to contribute to the lower-income spouse’s RRSP. The contributor still claims the deduction and reduces their higher income that is subject to higher marginal tax rates.

When it comes time for retirement, each spouse will have retirement income to report. With each spouse having an RRSP, they can respectively decide when and how much to withdraw for retirement purposes without the limitation of the 50 per cent pension splitting rule that would apply if the higher-income spouse simply contributed to their own RRSP.

If the funds are in the lower-income spouse’s spousal RRSP account they could choose to start withdrawing and be taxed on the funds in their own hands even if, for other tax-planning reasons, the higher-income spouse did not withdraw RRSP funds in the same year.

TFSA contributions

If one gifts cash to a spouse and the spouse uses those funds to invest, any capital gains or investment income earned is attributable back to the individual who gifted the funds. An exception to this is if the recipient spouse uses the funds to contribute to their TFSA.

Since TFSA earnings are tax-free, there is no attribution back to the giftor. If the lower-income spouse could otherwise not fund their own TFSA, the higher-income spouse should absolutely do so to maximize the family capital that is invested in tax-advantaged accounts.

Spousal loans

If a high-salaried individual also has significant investment assets, outside of tax advantaged or tax-deferred accounts like TFSA or RRSP accounts, any investment income or capital gains will be subject to high marginal tax rates.

As we noted above, if you gift cash to your spouse and they invest it, the income and gains are attributed back to the giftor. A means to have this investment income taxed in the lower-income spouse’s hands is therefore to loan the funds to the spouse.

For CRA to recognize the loan as a bona fide arrangement, a loan agreement must be in place and the interest rate charged on the loan has to meet the minimum prescribed rate (i.e. a rate defined by the government) for spousal loans. While the rate can vary, in the current low-interest rate environment the current prescribed rate is one per cent.

If a portfolio can generate a four to five per cent return, the lower income spouse would report this as income and would pay, and deduct, from their income the one per cent interest expense and therefore pay tax on net returns of about three to four per cent. The higher-income spouse would report the one per cent loan interest as income but would no longer be reporting the investment return income and thus the household income subject to the highest marginal tax rate would be substantially reduced.

Pension income

A high-income Individual can have their lower-income spouse report up to 50 per cent of “eligible” pension income when they file their income tax returns.

If, as in a traditional stay-at-home situation, one spouse worked and is entitled to a pension and their spouse stayed home to raise the family, their household tax burden could be significantly reduced if each reported half the pension income and each of them benefitted not only from the graduated marginal tax rates but also benefitted from the personal exemption, the pension credit and any other personal tax credits.

As an example, if an individual living in Ontario had a pension of $70,000, was entitled to OAS and had a CPP entitlement of $10,000, he or she could expect to pay about $16,000 of tax in 2021 (which includes a claw-back of OAS benefits of about $1,200). This translates to an average tax rate of about 18.5 per cent with a marginal rate of tax of 42 per cent.

If that same individual split the pension with a spouse who was also entitled to OAS but had no CPP entitlement, the total tax bill for the household would be approximately $12,400. The OAS claw-back would be eliminated and the highest marginal rate for the individual’s income would be about 32.7 per cent.

Any method that can be used to reduce the household tax bill allows for reinvestment of the tax savings that will further compound over time and ultimately build more wealth. As a chartered accountant turned wealth manager, I use such tax reduction strategies wrapped around investment advice to help our clients achieve their vision for prosperity.

No matter the financial question you are grappling with, reach out to your wealth advisor for advice – true wealth accumulation is about more than investment selection.

If you have questions about intergenerational wealth management strategies, you can reach me at

This article is supplied by Joelle Hall of Hall O’Brien Wealth Counsel, Director, Wealth Management, Portfolio Manager, and Investment Advisor with Richardson Wealth. 

Hall O’Brien Wealth Counsel specialize in tax-efficient portfolios and planning. We speak your language, so you feel confident in the plan we implement together.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

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