In many marriages or common-law partnerships, one spouse or common-law partner earns more income, and therefore, the two spouses or partners may find themselves in different tax brackets. If there is the opportunity to move income from being taxed in the hands of the higher-income spouse to being taxed in the lower-income spouse, then a tax savings will result. This type of tax planning in known as income splitting.
Given that Canada has progressive tax rates, the higher the income, the higher the income tax rate. Taking into consideration provincial taxes, the top combined marginal provincial and federal tax rate is over 50% in many provinces. The highest personal income tax rates range from 54.80% in Newfoundland to 44.50% in Nunavut.
The amount of tax savings from income splitting will depend on the difference in income between the spouses, as well as each spouse’s marginal tax rate. Note that the term spouse includes both married partners and common-law partners. Detailed information about personal income tax rates at differing taxable income brackets can be found in our Tax Facts publication.
This article covers strategies for splitting income in retirement, saving and creating investments for the lower-income spouse, and business financing.
Tax Facts 2024
Tax Facts 2024 provides you with a summary of 2024 personal income tax rates and amounts, as well as corporate tax rates based on announcements made to July 1, 2024.
Read moreImportant considerations for income splitting in Canada
Effective income splitting requires the couple to work together with a long-term focus to realize the tax savings—while the benefits may not be immediate, they are intended to build over time.
In general, this type of investment planning would only come after both spouses have taken advantage of ways to earn investment income tax free—such as using a Tax-Free Savings Account (TFSA) or a First Home Savings Account (FHSA)—and where Registered Retirement Savings Plans (RRSP) have been used to their best advantage. For more information about these savings plans, see our article, Q&A: Answering your tax questions on RRSPs, TFSAs, and the new First-Home Savings Account (FHSA).
Taxpayers who are majority shareholders in private corporations generally have the greatest ability to take advantage of income splitting planning. This is addressed in our article, Private corporation and income splitting.
There are rules that prevent income from gifts of property or loans made at less than arm’s length terms to be split with a spouse, as the rules will attribute this income back to the spouse who made the gift or loan. The planning in this article avoids these income attribution situations.
Five income splitting strategies
Here are five practical strategies that couples can use to effectively split income and reduce their overall tax burden.
To the extent possible, the lower-income spouse’s salary or self-employment earnings should be saved for investment purposes, while the higher-income spouse pays for household expenses such as food, clothing, and mortgage payments. This ensures that the family’s total investment income is taxed at the lowest possible rate.
The main planning behind spousal RRSPs is to allow for income splitting in retirement. A contribution to your spouse’s RRSP will qualify as a tax deduction for you as long as your total contributions to your RRSP and your spouse’s RRSP do not exceed your contribution limit for the year. Then, when withdrawals are made in retirement, the withdrawal is taxed in your spouse’s hands, which is anticipated to be taxed at a lower rate than what you will pay in retirement.
However, if a withdrawal is made from the spousal RRSP within three years of contribution, then the income will be taxed in your hands, and not your spouse’s.
However, the government will allow you and your spouse to apply to split the combined CPP benefit, which can help to even out income in retirement. The government calls this plan pension sharing, and you can apply to do these even after you have started receiving your CPP benefit. The goal is for you and your spouse to be in the same tax bracket to maximize the tax benefit of income splitting.
Attention must be paid to the legal details, and it is recommended that you both document the arrangement in a partnership agreement. Generally, to be considered a bona fide partner, your spouse must either devote a significant amount of their time, specified skills, or training to the business or must have invested their own property in the business. You must ensure that your spouse’s share of income is reasonable compared with the amount of work or capital put into the business.
However, if the venture is risky, an interest-free loan would not qualify for capital loss treatment should the venture fail, which means that you could lose your investment and not get a tax deduction from the loss. Where this is a risk, becoming a partner by contributing capital and establishing a partnership agreement would allow you to share in the start-up losses and eventual profit. It would also allow you to claim a tax loss if the business fails.
How BDO can help
While each of these ideas is relatively simple, you may have questions about the best way to implement this planning in your circumstances.
Your BDO advisor is ready to help.
The information in this publication is current as of June 4, 2025.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.