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How to use income splitting to reduce your tax bill

Last updated: Jun. 5, 2023 

What is income splitting?

Income splitting is the strategy of redistributing income within a family—usually from a spouse in a higher tax bracket to a spouse in a lower tax bracket—to reduce a family’s overall tax bill.

In general, income splitting works best when one spouse earns significantly more income than the other, so the tax savings are more significant.

Attribution rules

Income splitting isn’t as simple as having the higher-income earner gift investments or investment money to the lower-income earner. The CRA has attribution rules that require individuals to declare income sources, including any income made from investments with savings or capital. As such, any income generated from a gifted investment would be attributed back to the high earner and taxed at a higher rate.

Fortunately, there are some exceptions to these rules. Below we outline four income-splitting strategies you can use to pay less tax as a family and grow your wealth.

As always, it is recommended that you seek advice from a tax specialist before proceeding with any income-splitting strategies.

  1. Lending investment money to your spouse/partner
  2. Make contributions to a spousal RRSP
  3. Max out your spousal TFSAs
  4. Split pension income

Strategy #1: Lend investment money to your spouse/partner

While the attribution rules apply to spousal or partner gifts of investments, they do not apply to loans. The CRA allows spouses to loan each other money for investment or commercial use so long as the minimum interest paid on the loan meets the CRA-prescribed interest rate.

The prescribed rate remains fixed for the term of the loan, so if the investment has an expected return that is higher than the prescribed interest rate, it’s a good way to help bring down a family’s taxable income.

The current prescribed rate is 5% and will hold until at least September 30, 2023. At the current rate, an investment would need to have a return of more than 5% to benefit from this strategy.

In terms of repayment, the borrower must pay the interest by January 30 of the following year, otherwise, the CRA will still attribute the loan back to the higher-income earner and they will be taxed at a higher rate.

 As with all income-splitting strategies, this strategy has its benefits and drawbacks.


  • Stable loan terms: The loan is locked in at the CRA-prescribed rate at the time the loan is issued, and interest must be paid by January 30 of each year, so there is no guesswork about the repayment schedule or fear of a rate increase.
  • A win-win for income shifting: While the high earner must declare the interest paid to them as income, their total income only increases by the prescribed rate at the time of the loan (currently 4%). Likewise, the lower-income earner must declare any dividends or income generated from the loan, but as long as they receive a higher rate of return than the prescribed rate at the time of the loan (for example, greater than the current 4%), they family still comes out ahead. Plus, income earned is taxed at the lower-income earner’s rate.
  • Deductibles: Any interest payments made can be deducted from the lower-income earner’s taxable income.


  • Legal requirements: As with any other loan, there needs to be a loan agreement or promissory note drafted to make the loan official and to outline the terms. Seeking legal counsel to do this is highly recommended.
  • Estate complications: If either spouse passes before the loan is repaid, it can create potential headaches for the executor and next of kin, especially if estate plans do not include contingencies around these scenarios. For example, if the higher-earning spouse passes before the loan is repaid, is the surviving spouse financially able to repay the loan? It is highly recommended that estate plans include provisions for spousal loans.
  • Accounting complications: This income-splitting strategy requires extra tax reporting steps that may require professional accounting support, which is an additional cost for those who typically prepare their own tax returns.
  • Record keeping: A detailed record of transactions must be kept in case of a CRA audit. While this isn’t a heavy lift, it is still another piece of paperwork you must track in addition to your current administrative burden as a small business owner.
  • Costs: From legal advice to estate planning to additional accounting support, there are many costs associated with establishing a spousal loan correctly. These need to be weighed against the potential rate of return to ensure that you’re still benefiting financially.


You can lend money to your spouse as long as you follow these rules:

  • It must be an interest-bearing loan and you need to have a loan agreement or promissory note in place.
  • The interest needs to match the prescribed rate set by the CRA at the time the loan is made.
  • The prescribed rate remains fixed for the term of the loan, so if your investment has expected returns higher than the prescribed interest rate, it will be a good way to help bring down your taxable income. Any return is taxed at your spouse’s lower rate. Plus, the loan interest expense can be deducted from your spouse.
  • Your spouse must pay the interest by January 30 of the following year – it cannot simply be added to the value of the loan.
  • There are costs and complications associated with setting up and maintaining a spousal loan. These need to be weighed against the benefits to ensure it is the right tax-saving tool for your family.

Strategy #2: Make contributions to a spousal RRSP

For couples where one spouse earns more than the other, a spousal Registered Retirement Savings Plan (RRSP) can lower the tax burden now and in retirement.

In this strategy, the higher-income spouse with the larger contribution limit puts money into an RRSP in the lower-income spouse’s name. While the high earner gives up some of their contribution room within that tax year, they also get to claim the tax deduction.

In retirement, the lower-income spouse converts the RRSP to a Registered Retirement Income Fund (RRIF) and pays less tax at that time due to the marginal tax rate. Note that if you are planning to convert your RRSP to an RRIF at age 65+, you may benefit from pension splitting as outlined below (early withdrawal rules also apply).

If your spouse is earning less money than you are currently, there’s a good chance they’ll have less income in retirement as well. The spousal RRSP can redistribute retirement savings to be more equitable while helping you pay less tax overall.


  • Ease of set up: Unlike the spousal loan, the spousal RRSP can be set up very quickly and does not require the same level of tax, accounting, and estate planning support.
  • Immediate impact: The tax advantages are immediate for the higher-income earner in the form of a tax-deductible contribution.
  • Long-term stability: In retirement, it provides income stability for the lower-income earner while taking advantage of the lower tax rate when the RRSP is converted to a RRIF. Overall, it successfully lowers a family’s tax burden without much effort.


  • No early withdrawals: Funds must remain in the plan for at least three years from the last date of contribution to the spousal RRSP (including the year of contribution), or the CRA attribution rules kick in and the contributor will be taxed accordingly. Withdrawals made after 3 years from the last date of contribution to the spousal RRSP will be included in the recipients (spouse’s) taxable income.
  • Maximum contribution limit: This strategy only works if the higher-earning spouse has contribution room. If they’ve maxed their contributions in a given tax year, they cannot contribute even if the lower-income spouse has contribution room.


Here is what you need to know about spousal RRSPs:

  • You can also contribute to a spousal RRSP to help even out retirement savings for you and your spouse if they earn a lower income since the contribution room is based on earned income.
  • Your spouse must open a spousal RRSP account in their name (separate from their personal RRSP account).
  • All contributions are tax deductible for the higher-earning spouse in the same tax year the contributions are made.
  • Be careful not to go over your RRSP contribution limit as the higher earner. If you max out your RRSP, you cannot contribute to the spousal RRSP.
  • When your spouse withdraws the money in retirement, they’ll pay the tax on the withdrawals at their lower tax rate.

Strategy #3: Max out your spousal TFSAs

While Tax-Free Savings Accounts (TFSAs) do not reduce your current tax burden, they can provide families with tax-free income in future.

Anything that happens inside the TFSA is sheltered from tax so the income generated isn’t taxable to anyone. This means you can max out your TFSA contribution as well as your spouse’s without paying any tax – even when you go to withdraw. Unlike with a spousal RRSP, you can also withdraw funds at any time.

TFSAs can hold many different types of investments, from high-interest savings accounts to mutual funds to stocks and bonds. For example, you could choose to exclusively hold stocks in your TFSA. In this case, you would earn zero interest, but you would earn dividends and any capital gains (and losses) would not be taxed. Whatever type of investment you choose to place within a TFSA, it will allow you to earn tax-free income and potentially build your family’s wealth over time.

In 2023, the TFSA contribution limit will be $6,500 per person. Learn more about TFSA contribution limits in our blog post: What is the TFSA Limit for 2023?


  • Tax-free growth: All future earnings from your TFSA remain tax-free.
  • Ease of withdrawal: Unlike spousal RRSPs which must remain in the plan for three years, TFSAs can be withdrawn at any time.
  • Maximize spousal contributions: You can max out your spouse’s TFSA contributions without having to worry about attribution rules as you do with spousal loans.


  • Ease of withdrawal: Nothing is keeping you from withdrawing money from a TFSA at any time, which makes it all too easy to take out money before it’s had a chance to grow those long-term earnings that come with compounded interest.
  • No immediate tax break: TFSAs are not deductible and therefore, do not reduce your taxable income.


Here is what you need to know about TFSAs:

  • While TFSAs are not tax deductible, they provide long-term, tax-free growth.
  • You can max out your own and your spouse’s TFSA contribution without triggering any attribution rules, so it almost is like gifting money to your spouse.
  • This money can be withdrawn at any time without triggering any tax implications.
  • Withdrawing money early prevents you from maximizing your long-term investment.

To learn more about the differences between RRSPs and TFSAs, read our blog post.

Strategy #4: Split pension income

If you’re 65 years or older, you can split up to 50% of eligible pension income with your spouse or common-law partner.

If you both have eligible income, you’ll will first need to decide who transfers the money – usually, it’s transferred from the higher-income spouse to the lower-income spouse. Then, you will need to fill out the Joint Election to Split Pension Income form when filing your personal tax returns.

Pension income eligible for splitting includes:

  • Lifetime annuity payments under a registered pension plan
  • RRSPs
  • Deferred profit-sharing plan
  • Payments from a Registered Retirement Income Fund (RRIF)

Pension-sharing income does not include:

  • Old Age Security benefits
  • Canada Pension Plan benefits
  • Death benefits
  • Retiring allowances
  • Excess amounts from an RRIF transferred to an RRSP, another RRIF or annuity
  • Specific income as reported on your T4RSP slips
  • Amounts distributed from a retirement compensation arrangement on your T4A-RCA slip

As a reminder, you must be over 65 to make RRIF withdrawals. If you are under the age of 65, the pension income you are eligible to split is further limited (often only eligible in the case of the death of a spouse or partner). Visit the CRA website for more information.


  • Lower taxable income: If you and your spouse are in different tax brackets at retirement, income-splitting could lower the overall tax bill for your family. This could be very beneficial if you receive income from investments, rental properties, etc., along with government pension benefits.
  • Ease of set up: To set this up, you just fill out the Joint Election to Split Pension Income form when filing your personal tax returns.
  • Pension Income Tax Credit: The federal government and provinces (excluding Quebec) have additional tax credits you can apply for. For example, if you split your pension income with a spouse who is not currently receiving a pension, that spouse can also claim up to 15% of $2,000 in eligible pension income. This Pension Income Tax Credit would translate to a maximum of $300 in federal tax savings.


  • Same tax bracket: This strategy is not helpful if you are in the same tax bracket as there would be no benefit to splitting your pension income.
  • Restrictions: Certain pension income doesn’t qualify for splitting, such as Old Age Security.


Here is how pension splitting works:

  • If you’re 65 years or older, you can split up to 50% of eligible pension income with your spouse
  • Eligible pension income includes:
  • Lifetime annuity payments under a registered pension plan
  • RRSPs
  • Deferred profit-sharing plan
  • Payments from a RRIF
  • While you’ll still receive the actual income, you can split it on your tax return to lower your payable tax.
  • The federal government and each province (excluding Quebec) also have a pension income tax credit that can provide additional tax savings on eligible pension income. There are rules in place to claim the credits so speak with a tax specialist to ensure you are eligible.

Additional income-splitting strategies

Below, we highlight some additional income-splitting strategies available to Canadian taxpayers.

Income splitting for corporations

If you’re incorporated and your wife and children are set up as shareholders, you can pay them dividends. However, a word of caution: the Tax On Split Income (TOSI) may apply to payments made to certain shareholders and can create an even larger tax bill. TOSI applies tax at the highest marginal rate, so these plans must be carefully reviewed by a tax specialist before payments are made.

Loaning money to a family trust

Similar to a spousal loan, in this strategy, funds are loaned to the trust from the high-income earner. The dividends can be reinvested and grow the trust. When the beneficiaries of the trust – likely the children and grandchildren – are paid out, they are taxed at the lower marginal rate. If they are students, they pay very little tax.

As with spousal loans, however, this is a more complex strategy that requires additional legal and accounting support to set up and maintain.

Sharing Canada Pension Plan

While you cannot split Canada Pension Plan (CPP) income, you can apply to share it by filling out form ISP1002. According to the CRA rules, to be eligible you must be receiving your pension, or be eligible to receive it, and be living with your legal spouse or common-law partner.

The amount of pension that can be shared is based on the number of months you and your spouse lived together during your joint contributory period. As with the other strategies, sharing CPP could result in tax savings as a family.


Income splitting is one of the most effective ways families can lower their tax burden and save money.

Each income-splitting strategy comes with benefits and drawbacks and, in some cases, very complicated tax rules. As such, it is always best to seek professional tax (and where necessary, legal and estate) advice to ensure which strategy is the right one for your unique tax situation.

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