Income splitting in Canada has long been a legal strategy for reducing taxes, especially for high-income families, incorporated professionals, and small business owners. However, the CRA's Tax on Split Income (TOSI) rules significantly changed how and when you can split income with family members.
In this guide, we’ll explain how income splitting in Canada works, who is affected by TOSI rules, and how to legally structure your family tax planning to reduce your taxable income and avoid costly CRA audits.
Understanding Income Splitting: The Basics
Income splitting is a smart way to save on taxes. It's a strategy where a family's total income is shared among its members. This helps lower the overall tax amount the family pays.
What is Income Splitting?
Income splitting is a tax planning strategy where a higher-income family member transfers or allocates a portion of their income to a lower-income spouse, child, or family member. The goal is to move income from high-tax hands to low-tax hands and lower the overall family tax bill, since lower-income individuals are taxed at lower rates in Canada’s progressive tax system. The goal is to
Typical income splitting methods include:
- Paying salaries to a spouse or adult child
- Dividends from a private corporation
- Spousal RRSP contributions
- Family trusts
- Pension income splitting (for retirees)
But here's the catch: CRA doesn’t allow just anyone to split income freely — especially if it’s done primarily for tax avoidance.
Why is Income Splitting Advantageous in Canada?
Canada has a progressive tax system. This means you pay more tax as you earn more money. When income shifts to family members earning less, the whole family pays less tax. Their marginal tax rate goes down. People with lower incomes may also get more tax credits or benefits. This lowers the family's total tax bill.
What Is TOSI? (Tax on Split Income Rules)
The Tax on Split Income (TOSI) is a set of rules introduced by the Canada Revenue Agency (CRA) to prevent income sprinkling: a form of income splitting used by business owners to distribute corporate income to family members in lower tax brackets.
Since 2018, TOSI applies to most income paid to a spouse or child from:
- Private corporations (dividends, interest, etc.)
- Partnerships
- Trusts
- Professional corporations
If income is caught under TOSI, it is taxed at the highest marginal tax rate, regardless of the recipient’s personal income level.
When Does TOSI Apply?
TOSI applies when income is paid to a family member who does not meaningfully contribute to the business — meaning they don’t work in the business regularly, aren’t shareholders with voting control, or haven’t invested capital.
Common triggers for TOSI in Canada:
- Paying dividends to an adult child who doesn’t work in the business
- Income from a private corporation earned by a spouse who is not active
- Distributions from a family trust to minors or inactive beneficiaries
Exceptions to TOSI include:
- Individuals over age 65
- Spouses of active shareholders over 65
- Family members who work more than 20 hours/week in the business
- Capital gains on qualified small business shares
- Inherited property from a deceased individual
Who is Eligible for Income Splitting in Canada?
Not everyone can use income splitting strategies in Canada. If you want to take advantage of these strategies, you need to meet some important requirements:
- You must be married or living with someone as a common-law partner for at least a year
- Both you and your partner need to live in Canada for tax purposes.
- You shouldn’t have been separated for more than 90 days during the year because of a breakup.
Special Rules for Pension Income Splitting
If you’re looking to split pension income, there are some extra rules:
- The spouse who receives the split income can be any age.
- The spouse who has the pension must be at least 65 years old to split most types of pension income.
- If the spouse with the pension is younger than 65, they can only split certain types of pensions, mostly from their job.
- Keep in mind that this is about taxes, not actual money being transferred. The person with the pension still gets the money, but for tax reasons, it’s counted as split.
- You’ll need to fill out a form called T1032 when you do your taxes.
Income Splitting for Business Owners
- If you own a business and want to split income, here are some things to remember:
- Your family members must be real shareholders to receive dividends.
- Any salary you pay them must be fair for the work they do.
Be careful of the Tax on Split Income (TOSI) rules, which can make family members pay a higher tax rate on dividends. Just because you meet the eligibility requirements doesn’t mean you can do whatever you want. You still have to follow specific rules for each type of income splitting strategy.
What Income Qualifies for Income Splitting in Canada?
Income splitting might sound awesome! It’s a way for families to pay less tax by moving money from the spouse who pays more tax to the one who pays less. But the Canada Revenue Agency (CRA) has some rules about what types of income you can split and what you can’t. Income you can split.
The CRA allows you to share some types of income with your spouse or family members. Here’s how:
Pension income is the easiest type to split:
- If you’re 65 or older, you can share up to 50% of your RRIF payments, registered pension payments, and annuities from RRSPs.
- If you’re younger than 65, you can only split workplace pension payments (these are lifetime annuities from registered pension plans).
- No money changes hands; it’s just a tax choice you make using Form T1032.
You can also split business income, but there are some rules:
- You can pay family members a salary, but it has to be “reasonable” for the work they do.
- You can give dividends to family shareholders, but be careful of TOSI (Tax on Split Income) rules that might make you pay a higher tax rate.
- Family trusts can share income with family members who pay less tax if set up correctly.
- If family members are real partners, you can share income from a partnership.
Investment income can also be split, but you need to plan carefully:
- You can give your spouse a loan at a set interest rate for them to invest—any money they make above that rate is taxed in their name.
- Putting money into a spousal RRSP lets you claim a tax deduction while your spouse pays tax when they take money out.
- Contributions to a TFSA for your spouse don’t have any attribution rules—this is one of the easiest ways to split income.
- Structuring property ownership smartly can help you share future capital gains.
Income that You Can’t Split
Even with the best plans, some types of income just can’t be split:
- Government benefits like OAS and CPP/QPP (though you can “share” CPP/QPP with your spouse, which is different from splitting).
- Your job income (unless you work in a family business).
- Regular RRSP withdrawals that haven’t been turned into annuities or RRIFs.
- Investment income from assets you’ve given to your spouse or kids.
- Severance pay or retirement allowances from your job.
- Rental income from properties you own personally (but corporate structures might help).
Working with a tax expert who knows your situation can help you create a smart income-splitting plan that saves you money while keeping you in line with the CRA.
How to Reduce Taxes in Canada Through Family Tax Planning
Family tax planning in Canada involves looking at all the ways your household earns and reports income — and how to legally structure it for tax efficiency.
Top strategies include:
- Income splitting (when possible)
- Pension splitting
- Combining tax credits
- Optimizing RRSP and TFSA contributions
- Using spousal loans
Proper tax planning for families can result in thousands of dollars in annual tax savings.
Income Attribution Rules: What You Need to Know
Under CRA income attribution rules, income earned from money gifted or loaned to a spouse or minor child is generally attributed back to the original taxpayer — defeating the purpose of income splitting.
However, exceptions apply:
- Using a loan at the prescribed interest rates
- Gifting to adult children
- Transfers for fair market value
Avoiding income attribution CRA issues requires good record-keeping and professional advice.
Legal Income Splitting Strategies in Canada
Even with TOSI, there are legal income splitting strategies that Canadian families and businesses can use to lower taxes:
1. Paying Reasonable Salaries
The CRA allows payment of reasonable salaries to family members for actual work performed. The amount must reflect fair market value.
2. Pension Income Splitting
For Canadians over 65, up to 50% of eligible pension income (including RRIF withdrawals) can be split with a spouse — a huge tax savings strategy for retirees.
Do both spouses have to be 65 to split pension income?
No, both spouses do not have to be 65 years old. However, the age and type of pension income matter:
- If the transferring spouse is 65 or older, a wider range of pension income qualifies for splitting — including RRIF withdrawals and certain annuities.
- If the transferring spouse is under 65, the options are much more limited. Only pension income from a registered pension plan (RPP) can be split before age 65. In most cases, this means workplace pensions only — not RRIFs, RRSPs, or annuities purchased with RRSP funds.
3. Spousal RRSP Contributions
You can contribute to a spousal RRSP and claim the deduction on your income, shifting future income to your spouse at withdrawal time. 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
4. 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 the 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.
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's almost 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.
5. 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.
6. Family Trusts
A properly structured discretionary family trust can help distribute dividends to adult family members, provided they meet active involvement or capital contribution requirements.
7. Lending at CRA Prescribed Interest Rates
Use income attribution rules to your advantage by loaning funds to a lower-income spouse or child at the CRA-prescribed interest rate, with proper documentation. 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 CRAat 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.
8. Corporate Tax Planning and Income Splitting
For incorporated professionals and small business owners, corporate tax planning can still offer income-splitting opportunities, even with TOSI.
Some ideas include:
- Paying reasonable salaries to family employees
- Structuring share ownership for adult children involved in the business
- Using holding companies or capital gains exemptions
Always consult a Canadian tax advisor experienced with private corporation tax rules.
Actionable Tips for Legally Minimizing Family Taxes
Taking steps now can save you money later. Here are some clear actions to help your family reduce taxes.
Documenting Your Income Splitting Strategies
Keep good records of everything you do. The Canada Revenue Agency (CRA) might ask for proof. You need to show that your income splitting is real. Keep contracts, timesheets, and pay stubs. These documents prove genuine business work or other TOSI exemptions. Proper paperwork helps avoid problems with the CRA.
Regularly Reviewing Your Family's Tax Situation
Things change often. Your income might change. Your family situation could change. Tax laws also get updated. You should look at your tax strategy every year. Make sure it still works for your family. Adjust your plans if needed. This keeps your tax planning current and effective.
When to Seek Professional Tax Advice
Tax laws are complicated. TOSI rules are especially tricky. It's smart to talk to a tax professional. An accountant or tax lawyer can help you. They know the ins and outs of the law. They can make sure your plans follow the rules. This advice is most important when you plan big changes or deal with business income.
Connect with Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.
Disclaimer: The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended for use without consultation with accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.