Splitting Income to Save On Taxes

2015-04-10

Our tax system is progressive; your first earnings are taxed little or not at all, and your later earnings are taxed at a higher rate. For couples, the spouse with the highest income can transfer a portion to the other spouse to reduce their total tax bill.

14 Effective Ways to Equalize Your Retirement Income

  • Pensions under the Québec Pension Plan can be shared if the spouse with the higher retirement income also receives a higher pension from the Régie.
  • Income splitting can be applied to pensions, including pension benefits from a registered pension plan at any age and to withdrawals, as of age 65, from:
  • – a registered retirement income fund (RRIF);
    – a life income fund (LIF, RLIF)
  • The higher-income spouse can contribute to the other spouse’s registered retirement savings plan (RRSP).
  • The higher-income spouse can pay the couple’s expenses, leaving the other free to gradually accumulate savings.
  • The higher-income spouse can make an actual loan to the lower income spouse at the spousal rate so that the latter can invest in products with higher returns.
  • You can give money to your spouse to generate business income.
  • If the lower-income spouse has a non-income-generating asset (e.g., a house), he or she can trade it for an income-generating asset (e.g., an investment) with the same market value. The income then belongs to the spouse with the lower income.
  • You can give an asset that generates a capital gain to a minor child.
  • You can give your family allowance payment to your child.
  • If you give funds to either a spouse or a child, the income is taxable on the recipient’s tax return.
  • By investing in a testamentary trust, you can split up income generated after death.
  • You can split your income with minor children through a registered education plan (RESP).
  • You can give money to a child who has reached the age of majority to invest in a tax-free savings account (TFSA).
  • If you’re self-employed, you can pay your spouse a salary for any work that justifies it.

Remember…

Two low incomes are better than one high! A retired couple would be better off to have two incomes of $24,000 than one of $48,000. At the 2013 rates, they could save over $1,000 in taxes!

Be Careful!

  • Splitting an RRSP between married (or civil union) spouses has little effect if the couple breaks up and family patrimony rules apply. If common law spouses split an investment however, the money belongs to the owner of the RRSP and becomes a donation (unless otherwise set out in a common law agreement). Therefore, splitting pension income is a less risky way for common law spouses to save money on taxes.
  • When you contribute to your spouse’s RRSP, you pay the taxes on any withdrawal from the account made within two complete fiscal years (except the minimum required withdrawal for an RRIF). After this period, your spouse is the one who is taxed.
  • If you pay your spouse’s expenses, your spouse’s savings belong to him or her and are not part of the family patrimony.
  • If you give money to someone other than your spouse, you’ll be taxed on any past growth in the investment at the time of transfer.
  • If you give money to your child, you lose all control over it when the child reaches the age of majority.
  • Tax authorities impose certain rules to income attribution to prevent abuse:
    • If a parent gives an investment to a minor child, the income generated must be declared in the parent’s tax return (except capital gains).
    • If you give funds to your spouse, the income generated by the investment (or its sale at less than fair market value) must be declared on your tax return.
    • However, funds you give to your spouse to invest in a TFSA are exempt from that rule, as long as the funds stay in the TFSA.