Family Income Splitting Guide

Why Income Splitting Works

Progressive Tax Brackets (2024)

The Math

High earner at $200,000, spouse at $20,000:

• Shifting $30,000 from high to low earner
• Tax saved: ~$7,000 (marginal rate difference)
• Plus provincial tax savings

TOSI Rules Overview

What Is TOSI?

• Tax on Split Income
• Applies top marginal rate to split income
• Targets artificial income splitting
• Eliminates benefit of shifting income

Income Subject to TOSI

• Dividends from private corporations
• Income from related business
• Certain rental income
• Capital gains on related business shares

Excluded from TOSI

• Employment income (actually earned)
• Pension income splitting
• CPP sharing
• Prescribed rate loan income (if done properly)

Pension Income Splitting

How It Works

• Transfer up to 50% to spouse
• Elected annually on return
• Form T1032
• No actual money transfer needed

Eligible Pension Income

• RPP (registered pension plan) income—any age
• RRIF income—age 65+
• Annuity from RRSP—age 65+
• DPSP annuity payments

Benefits

• Both spouses can claim pension income amount
• Lower marginal rates
• May reduce OAS clawback
• Easy—just election on return

Spousal RRSP

How It Works

• Contribute to RRSP in spouse's name
• You get the deduction
• They own the RRSP
• Withdrawals taxed to them (after 3 years)

The 3-Year Attribution Rule

• Withdrawals within 3 calendar years
• Attributed back to contributor
• Wait until third January 1 after contribution
• Or contributor pays the tax

Planning Strategy

• High earner contributes during working years
• Gets deduction at high rate
• Lower-income spouse withdraws in retirement
• Pays tax at lower rate

CPP Pension Sharing

How It Works

• Share CPP with spouse during retirement
• Both must be 60+
• Both must be receiving CPP
• Share based on time lived together

Application

• Apply to Service Canada
• Form ISP1002
• Both spouses must consent
• Can be reversed

When Beneficial

• Unequal CPP amounts
• Different tax brackets
• OAS clawback concerns

Prescribed Rate Loans

How It Works

• Lend money to lower-income spouse
• At CRA prescribed rate
• Spouse invests the money
• Investment income taxed to them

Requirements

• Written loan agreement
• Interest at least at prescribed rate
• Interest paid by Jan 30 following year
• Proper documentation

Current Opportunity

• Prescribed rate is relatively low
• Lock in rate at time of loan
• Rate stays same for loan's life
• Can shift significant investment income

TFSA Contributions

Give Money for TFSA

• No attribution rules for TFSA
• Give spouse money for their TFSA
• Growth is tax-free anyway
• Simple and effective

Strategy

• High earner funds both TFSAs
• Maximize family TFSA room
• Tax-free growth regardless
• Withdrawals tax-free

Employing Family Members

Legitimate Employment

• Pay spouse or children for actual work
• Must be reasonable salary for work done
• Document hours and duties
• Business deducts, they report income

Requirements

• Real services provided
• Arm's length salary (what you'd pay stranger)
• T4 issued, withholdings made
• Time records maintained

TOSI Considerations

• Employment income not subject to TOSI
• Must be actual employment
• Dividends may trigger TOSI

RESP Contributions

Income Shifting to Children

• Contribute to child's RESP
• No deduction to contributor
• Growth and grants tax-deferred
• Taxed to student when withdrawn

Why It Works

• Student typically has low/no income
• Tuition credits offset tax
• Effective income shift to future

Attribution Rules Summary

Spousal Attribution

• Gift/loan to spouse at below-market rate
• Investment income attributed back to you
• Exception: Prescribed rate loan
• Exception: Gift for TFSA

Minor Children Attribution

• Gift to minor child
• Interest/dividends attributed to parent
• Capital gains stay with child
• Exception: Child Tax Benefit invested

Adult Children

• Generally no attribution
• But TOSI may apply to business income
• Capital gains usually clean

Business Income Strategies

With TOSI (More Complex)

• Family members must have meaningful involvement
• Or be over 25 with capital investment
• Or be 18-24 with labor contribution
• Complex rules require professional advice

Reasonable Compensation

• Pay salary for actual work
• Avoid dividends if TOSI applies
• Document involvement carefully

Putting It Together

Common Strategy Package

• Spousal RRSP during working years
• Fund both TFSAs
• Prescribed rate loan for investments
• Pension splitting in retirement
• CPP sharing if beneficial

Annual Review

• Recalculate pension split optimal amount
• Review investment loan interest paid
• Adjust based on income changes
• Consider new opportunities