The concept of income splitting involves shifting
income from one family member, who is in a higher
marginal tax bracket, to another family member,
who is in a lower marginal tax bracket, with the
primary objective of paying less income tax overall
across the family unit. Paying less tax usually means
there is more money remaining for consumption
and savings.

Income splitting strategies can work when the
individuals involved are in different marginal tax
brackets and provided the transfer of income
between the individuals is acceptable within the
rules of the Income Tax Act. The concept of income
splitting is considered one of the most effective
ways to decrease taxes and maximize cash flow
within a family unit.

The federal government has focused a great deal of
attention on income splitting in recent years, from
the perspective of what is permissible and what is
no longer permissible.

The following chart provides a way to visualize how 
much tax could be saved through income splitting 
between a taxpayer in the top tax bracket and a 
taxpayer in a lower tax bracket. The orange line
depicts the 2019 top marginal tax rate, federal and
provincial rates combined, for a taxpayer living in
Ontario. The jagged blue line represents the 2019
marginal tax brackets for all income ranges for a
person also living in Ontario. The area between the
orange and blue lines depicts the potential tax rate
savings that could be achieved depending upon the
marginal tax rates of the two taxpayers who are
income splitting.



Prescribed Rate Loan

The taxpayer in the higher marginal tax bracket
lends capital to the taxpayer in the lower
marginal bracket. The loan is documented
and an interest rate equal to at least the
government’s prescribed rate in effect at the
time the loan is established is charged by the
lender and paid by the borrower within 30 days
after the end of the calendar year. The lender
must include the interest in his or her income,
while the borrower may deduct the interest
assuming income earning investments were
purchased with the borrowed funds.

Pension Income Splitting

Up to 50 percent of eligible pension receipts
can be notionally shifted from one spouse’s
income tax return to the other spouse’s income
tax return.

CPP/QPP Income Splitting

There are specific circumstances under which
a couple is permitted to share a prescribed
portion of their CPP/QPP income, although
post-retirement benefits cannot be shared. The
rules to share a pension depend on whether
one spouse or both spouses contributed to
CPP/QPP. The portion of each spouse’s pension
that can be shared is based on the number of
months each spouse or common-law partner
lived together during their joint contributory

Cash Damming

To the extent a couple is already accumulating
savings in a non-registered portfolio, there
could be a benefit to having the lower-income
spouse use his or her income to purchase
investments, while the income from the
higher-income spouse is used to pay all of the
household expenses.

Dividends from Family Business

Business owners may be able to pay dividends
to family members; however, the new tax on
split income rules could apply and create an
additional tax burden rendering any income
splitting opportunity ineffective. Traditional
approaches can no longer be relied upon
without professional guidance.

Spousal RRSP

A spousal RRSP permits a couple to derive
immediate tax savings when a contribution is made. The contributing spouse uses his or her
contribution room, but the benefit is derived by
the couple because the RRSP belongs to the
annuitant spouse, who is typically expected to
have the lower income during retirement. This
strategy provides an opportunity to balance
income across the family unit when the funds
are later drawn upon.

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Sean Schneider, BBA

Sean Schneider, BBA

Licensed Advisor

Sean Says..."The ideal way of designing your finances will change from time to time. It always depends on situation, expertise and execution".

The value of income splitting is determined by
analyzing the benefits and costs associated with
the strategy. Before entering into an income
splitting arrangement, the taxpayers involved
should take the time to analyze the overall impact.

A shift of income to a lower-income spouse can
reduce the overall tax burden of the higher-income
spouse and increase the tax burden of the lower-
income spouse. The amount of income involved
and the taxpayers’ positions within their marginal
brackets can impact the overall outcome. There is a
possibility of moving across more than one bracket,
resulting in an additional advantage or additional 
cost; this can only be determined through a fact-
specific analysis.

While some strategies are easy to implement
and maintain, it can be wise to seek professional
support in analyzing the costs and benefits. The
professional’s services can have a cost that should
be considered.

The following are examples of other costs associated with implementing more sophisticated strategies.

Legal Fees

Legal fees to draft a family trust deed and a
promissory note to document a prescribed
rate loan could be a consideration. A family
trust may be necessary if the lower-income
taxpayers are minors and cannot sign legal
documents or manage an investment account.
In addition, a family trust might be necessary
to control the investment funds and restrict
the access of spendthrift beneficiaries.

Annual Accounting Fees

Annual accounting fees in respect of the
family trust and other reporting costs, such as
the new trust disclosure rules that take effect
starting in 2021.

Corporate Legal Fees

Legal fees to reorganize a corporation in
order to introduce new shareholders may
be necessary to enable a dividend paying

Fees to respond to inquiries from the Canada Revenue Agency (CRA)

Accounting and/or legal fees to respond to
inquiries from the Canada Revenue Agency
(CRA). Even though an income splitting
strategy may be completely correct and legal,
the taxpayer is required to answer queries
and respond to challenges from the CRA.
Often documents and other information may be required, and professional support can be helpful when dealing with complex issues.

The benefits of income splitting are often easily
recognizable, but the costs and drawbacks may
not be as obvious. A careful analysis in advance of
undertaking any strategy will help to ensure the net
impact is well understood.

This commentary is published by The Institute in consultation with an editorial board comprised of recognized authorities in the fields of law, life insurance and estate administration. The Institute is the professional organization that administers and promotes the CLU® and CHS® designations in Canada.

The articles in Comment are not intended to provide legal, accounting or other advice in individual circumstances. Seek professional assistance before acting upon information included in this publication.

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Copyright 2019 ISSN 0382-7038 All Rights Reserved

James W. Kraft, CPA, CA, MTAX, TEP, CFP, FEA, CLU
Deborah Kraft, MTAX, LLM, TEP, CFP, CLU
Published by:
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