Income splitting with a spouse is a tax strategy that can help reduce your overall family tax bill. Here's why it’s beneficial in Canada:
1. Lower Overall Tax Rate
Canada has a progressive tax system, meaning higher income is taxed at higher rates. If one spouse earns significantly more, shifting some of that income to the lower-income spouse can reduce the combined taxes owed.
2. Pension Income Splitting
If you're receiving eligible pension income (such as from a RRIF or a private pension plan), you can split up to 50% of that income with your spouse or common-law partner. This can lower your marginal tax rate and possibly allow both spouses to claim pension-related credits.
3. Use of Spousal RRSPs
Contributing to a Spousal RRSP lets the higher-income spouse get a tax deduction while the lower-income spouse eventually withdraws the funds at a lower tax rate in retirement.
4. Attribution Rules and Exceptions
Normally, income transferred to a spouse is taxed back to the giver (due to attribution rules), but certain strategies—like spousal loans at the CRA’s prescribed rate—can legally bypass this if done properly.
5. Maximize Tax Credits and Benefits
Shifting income may allow the lower-income spouse to qualify for benefits like the GST/HST credit, Canada Child Benefit (CCB), or Age Credit, which are income-tested.
Here are 5 common strategies to split income with a spouse in Canada, while staying within CRA rules:
1. Pension Income Splitting (Age 65+ or eligible pensioners)
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How it works: You can allocate up to 50% of eligible pension income (e.g., RRIF withdrawals, private pensions) to your spouse on your tax return.
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Tax benefit: Reduces the higher-income spouse’s tax bracket and can help both spouses claim the pension income amount ($2,000 tax credit).
No need to transfer actual money — it's just a paper allocation.
2. Spousal RRSP Contributions
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How it works: The higher-income spouse contributes to a spousal RRSP and gets the tax deduction, but the lower-income spouse owns the account and is taxed on future withdrawals (if held for 3+ years).
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Tax benefit: Lowers taxable income today, and withdrawals are taxed at the lower-income spouse’s rate later.
Great for retirement income splitting before age 65.
3. Prescribed Rate Loan Strategy
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How it works: The higher-income spouse loans money to the lower-income spouse at the CRA’s prescribed interest rate (currently 5% as of Q2 2025) under a formal agreement.
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The lower-income spouse invests the loaned funds and is taxed on the investment income.
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Tax benefit: Shifts investment income from the higher to the lower tax bracket.
You must pay interest annually by January 30th of the following year to avoid attribution rules.
4. Sharing CPP Retirement Benefits
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How it works: Spouses can apply to share CPP retirement benefits based on how long they lived together while contributing to CPP.
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Tax benefit: Reduces the tax burden on the higher-income spouse.
Apply through Service Canada, not the CRA.
5. Transferring Tax Credits
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How it works: If one spouse can't fully use certain non-refundable tax credits (like the basic personal amount, tuition, age amount, or disability amount), the unused portion can be transferred to the other.
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Tax benefit: Reduces total family tax.
By taking advantage of income splitting, you maximize deductions and credits and can reduce your tax bill. If, as a result of this strategy your taxes are complex, you should be contacting our office to ensure accuracy in your returns.