Five savvy strategies that can reduce your tax bill

September 2019

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Keeping your money out of the hands of the taxman is just as important as earning it in the first place. One of the ways you can reduce your household tax bill is through “income splitting,” or shifting household income from high-income earners to lower-income family members. While there are only a few ways to implement income splitting in Canada, it’s important to review your tax situation to check whether you could benefit— below are five income splitting strategies to help reduce your family’s overall taxes.*


Setup a spousal RRSP


The higher-income spouse can contribute to an RRSP set up for their lower-income spouse. The higher-income spouse gets the tax deduction (and uses their RRSP contribution room), while the lower-income spouse becomes the owner of the funds which are eventually withdrawn (and taxed) in their hands.


This strategy works with the RRSP Home Buyers’ Plan, as well. A higher-income spouse can contribute to an RRSP for a lower-income spouse, who then withdraws up to $35,000 when purchasing an eligible home as a first-time buyer. Note, income attribution to the higher-income spouse can apply to RRSP withdrawals if the higher income spouse contributed to the spousal RRSP in the current or two prior years.


Set up spousal loans


If you’re the higher-income spouse, you can loan (not give) funds to your spouse in order to take advantage of their lower marginal tax rates. (Without a documented loan, and evidence of interest paid, the income earned on the investments will be attributed back to you and taxed in your hands.)


You’ll need to charge your spouse interest at the Canada Revenue Agency’s prescribed interest rate, currently 2%, payable by January 30th the following year the loan is made. Your spouse will then invest the loaned funds in non-registered investment accounts which generate investment income, dividends, or capital gains—and this investment income will be taxable to your spouse at their lower marginal tax rate, effectively reducing your family’s tax bill.


Gift funds to invest in a Tax-Free Savings Account.


While income attribution rules set out in the income tax act normally prohibit one spouse from giving funds to the other without having the investment income “attributed” back to the gifting spouse, Tax-Free Savings Accounts are exempt from the attribution rules. As a result, a higher-income spouse can give money to a lower-income spouse, who can then invest those funds inside a TFSA with no fear of income attribution.


Have a higher-earning spouse pay household expenses


Allowing a lower-income spouse to invest more of their earnings. While this isn’t technically an “income-splitting” mechanism, it means that a lower-income-earning spouse can maximize investments taxed at a lower rate.


Don’t forget about pension income splitting!


Pension splitting allows higher-income spouses to lower their tax bill by sharing up to 50% of eligible pension income—defined as pension plan or annuity payments—with a spouse. (The payments are not actually split between spouses; the allocation is reported on tax forms at tax time.)


If you or your spouse is an incorporated professional or business owner, there are often additional strategies that can reduce your household tax bill. But the good news is that many of the methods noted above are simple and low cost to implement, meaning the payoff can be high relative to the effort and cost. Could your household benefit from a lower tax bill through any of the techniques we’ve described here? Contact us to schedule a review.



* The views and information expressed in this article do not represent tax and/or legal advice. Please speak to your professional tax and/or legal adviser for more information.


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