Canada: Income Splitting Strategies For Canadians

The term "income splitting" refers to the transfer of taxable income from a higher-income family member to a lower-income family member to reduce the family's overall income tax payable. The advantages of income splitting are clear: lower-income earners pay tax at a rate of 20 to 26 per cent, whereas higher-income earners may pay 47 to 54 per cent, depending on the province or territory of residence.

With the Family Tax Cut, couples with minor children had finally experienced a taste – albeit a small one – of what it was like to split employment income between spouses. The Family Tax Cut was a tax credit that provided up to $2,000 in tax savings. However, the credit was repealed for 2016 and later years. Many families wonder why Canadians don't have the same opportunities to split income as our American friends who are permitted to file joint spousal returns to effectively split their income.

Though Canadian taxpayers may no longer effectively split employment income, practically speaking there are many other income-splitting tools available. A taxpayer might ask, "Can't I just give money to my spouse or children so that they can earn investment income and pay the tax?" The answer often is "no," since the Income Tax Act includes what are known as the attribution rules, which forbid that type of simple tax planning. Under those rules, income is "attributed back" to the person who made the gift or loan. Fortunately for taxpayers, there are many forms of income that are not caught by these attribution rules. The most common exceptions to the attribution rules are discussed below.

Prescribed rate loans

One popular strategy to split investment income between spouses is the prescribed rate loan, which sees the higher-income spouse making a loan to the lower-income spouse, who in turn invests the funds. The strategy succeeds when the rate of return earned by the lower-income spouse on those funds exceeds the interest paid to the higher-income spouse, thus generating a profit that is taxable at lower rates. Three requirements must be met:

  1. The face value of the loan must be equal to the funds transferred (no gifts between spouses).
  2. The interest must be charged at a rate equal to or greater than the prescribed rate (currently 1%).
  3. The interest must actually be paid to the spouse (in cash, by cheque or by bank transfer) by January 30 of the following calendar year. If this deadline is missed, attribution will apply for the current calendar year and all future years.

As an example, assume that Jane (the higher-income spouse) lends $100,000 to John (the lower-income spouse), and charges him the one per cent prescribed rate of interest. John uses the funds to earn a six per cent annual return. The typical savings (in Ontario) can be illustrated as follows:

Jane John Total
Without a prescribed rate loan:
Taxable income
$6,000 - $6,000
Tax rate
53.53% 20.05%
Income tax payable
$3,212 - $3,212
Using a prescribed rate loan:
Return on investments
- $6,000 $6,000
Prescribed rate loan interest
$1,000 ($1,000) -
Taxable income

$1,000 $5,000 $6,000
Tax rate
53.53% 20.05%
Income tax payable
$535 $1,003 $1,538
Annual savings ($3,212 - $1,538) $1,674

The rate of interest payable to the higher-income spouse is fixed at the time the loan is made and remains the same for the term of the loan. This strategy is popular now due to the historically low current prescribed rate of one per cent. But time is ticking! Rates have nowhere to go but up. Take care when implementing this strategy to ensure the rules are met and to avoid unexpected capital gains or limitations on capital losses that may result on the transfer by the higher-income spouse. These rules are complex; professional advice is necessary.


Several strategies are available to families, depending on the circumstances:

  • Interest-free loans for business income
    The attribution rules apply to income from property (e.g. investments, rental units) but not income from a business. Therefore, a gift or interest-free loan may be made to a spouse, child or other family member to carry on a business, and the income from that business is taxable in that person's hands.
  • Capital gains for minor children
    The attribution rules do not apply to capital gains realized by children, including minor children. While interest, dividends or other income earned in a portfolio might still be attributed back to the parent, capital gains remain taxable to the child.
  • Loans or gifts to children who turn 18 in the year
    The attribution rules generally do not apply to income earned on gifts or loans made to children in the year they turn 18. If a child was at least 17 years old on December 31, 2015, a gift or loan may be made to them at any time in 2016 and the attribution rules may not apply to income earned using those funds. Depending on the circumstances, it is possible that a lesser-known attribution rule found in subsection 56(4.1) of the Income Tax Act may apply to a loan made to a child age 18 or over. Make sure you obtain professional tax advice.
  • Income earned on Canada Child Benefit payments
    If funds received through the Canada Child Benefit are deposited into an account solely in the child's name, most income earned on those funds will not be attributed to the parent.
  • Registered Education Savings Plans (RESPs)
    An RESP is an attractive savings strategy for a child's post-secondary education. While there are no deductions for contributions, and there are contribution limits, the government provides matching grants of 20 per cent or more depending on a family's net income. The grants and the income earned within the RESP are taxable only when withdrawn and are taxed on the child's tax return. Assuming a 50 per cent tax rate for the parent, a five per cent annual compound rate of return, and a 20 per cent government grant, a $100 contribution to an RESP would grow to $289 after 18 years, and can likely be withdrawn tax-free if the child's income remains sufficiently low during school. Compare that $289 to just $156 if the original $100 contribution were instead invested in an unregistered account.
  • Registered Disability Savings Plans (RDSPs)
    An RDSP is a plan created for the benefit of a family member under age 60 who is eligible for the disability tax credit. As with an RESP, contributions are not tax-deductible and there are contribution limits, however, income and government grants (up to 300 per cent of the contribution, depending on family income) grow tax-free in the plan until they are withdrawn by or for the benefit of the person with the disability. At that time, the funds are taxed on the disabled person's tax return, likely at a lower rate than would apply to the person who contributed the funds.
  • Spousal Registered Retirement Savings Plans (RRSPs)
    Contributions by a high-income earner give rise to a tax deduction at their high tax rate while subsequent withdrawals by that person's spouse are taxed on the spouse's return. But watch out for the "three-year attribution rule": if the spouse withdraws funds from the spousal RRSP, to the extent that any contributions were made in the year of the withdrawal (even after the day the withdrawal occurs) or in either of the two previous calendar years, the withdrawal will be attributed to the contributing spouse and taxed at that spouse's higher rate.
  • Graduated Rate Estates (GREs)
    Beneficiaries of a family member's estate may be able to reduce the family's overall tax payable by designating the estate as a GRE. The estate will then have its own set of graduated tax rates for up to 36 months after the date of death. Income earned on the investments of a deceased person may attract less tax in the GRE than in the beneficiaries' hands. The rules regarding GREs can be complex; speak to your Collins Barrow advisor for guidance.


  • Pension income splitting
    A spouse may split up to 50 per cent of eligible pension income with a lower-income spouse by completing CRA form T1032. The most common types of eligible pension income include annual benefits paid from a registered pension plan and payments from RRSPs and RRIFs if the pensioner reaches age 65 or older during the year.
  • CPP sharing
    Spouses may split their Canada Pension Plan payments if they file Form ISP1002 with Service Canada. For example, if one spouse would otherwise collect $10,000 of CPP each year and the other spouse only $2,000 (a total of $12,000 for the couple), they would instead each receive $6,000. If they split the CPP payments, the couple's overall tax payable may be reduced in many circumstances. This is not simply a notional income splitting like the pension splitting discussed above; the actual cheques written by the government provide exactly half of the total CPP to each spouse. This process is required in addition to pension income splitting, as CPP is not a form of eligible pension income.

Business owners

  • Salaries paid to family members
    Business owners may pay salaries to their spouses and children for work they perform for the business, with the related income taxed at the lower graduated tax rates of those spouses or children. Such business owners should beware, however, that payments to family members are often an area of focus during CRA audits. In addition, the CRA may conduct interviews and request documentation, such as time cards, as proof that family members actually performed the services for which they were paid. If the CRA is not satisfied that family members actually performed the work, it may deny the expense to the business. Further, the amount of the expense must be reasonable in the circumstances, or it may be denied. Do not pay your 8-year-old $100 an hour to sweep floors!
  • Loans from private corporations to family members
    If a business is incorporated, any loan made to a family member is included in the family member's income in the year received unless it can be shown that it was repaid to the corporation within two year-ends. Corporate owner-managers can consider making loans to children age 18 or over who are pursuing post-secondary education. While such loans may be taxable income to the child, the funds would likely be taxed at a lower rate than the owner-manager's rate on a dividend that would otherwise be required to fund the child's post-secondary education. The loan might even be tax free if the child's income remains below the basic personal exemption. In the (somewhat unlikely) event that the child repays the loan to the corporation, the child would receive a deduction. If this repayment occurs in a year after the child graduates and earns a higher level of income, the deduction might even give rise to a large tax refund despite the fact that the initial loan might have been taxed at a low rate or may not have been taxed at all.
  • Discretionary shares held by children
    A common tax planning technique in an owner-managed private company setting is to issue discretionary – or "dividend sprinkling" – shares to family members. Owner-managers should consider issuing these shares to spouses and children to pay dividends to them and make use of their tax brackets, particularly if they plan to help children pay for post-secondary education. There are a few traps to consider. Children must be turning 18 years of age in the year they receive a dividend, otherwise the "kiddie tax" may apply to tax the children at the highest marginal rate. In addition, discretionary shares should only be issued after an "estate freeze," and professional advice is critical with this strategy.
  • Family trusts
    Although anyone may set up a family trust, these flexible tax-planning tools are most often used by owner-managers of private companies for the same reasons as discretionary shares, along with the ability to potentially claim multiple capital gains exemptions upon the sale of a business. Family trusts can be complicated from a tax perspective; professional advice is important.

These are just some of the most common strategies available to Canadians to split income with family members. Often, the difficulty lies in knowing which strategies would work best for you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions