Denika Heaton, BBA, JD, TEP, CEA Tax and Estate Planning Specialist, Private Wealth

Chris Hanley, CPA, CA, CFP, TEP Tax and Estate Planning Specialist, Private Wealth

Canada taxes individuals, not households, at progressive rates: the more you earn, the higher the tax rate applied to additional income. Provinces use a similar progressive system, with each province having its own tiers or “brackets”. When one married spouse or common-law partner earns substantially more than the other, the couple pays more combined tax than two people with the same total income divided evenly between them. Income splitting is simply an effort to even out that imbalance, shifting income from the higher earner, where it’s taxed at a high marginal rate, to the lower earner, where it’s taxed at a lower one.

If it were as simple as transferring money to a lower-income spouse to invest, everyone could do it. What makes it difficult are the attribution rules. Broadly, when you give or lend money to your spouse, and they earn investment income on it (e.g. interest, rent, dividends, or capital gains), the rules attribute that income back to you and tax it as though you earned it yourself. The same concept extends to gifts to minor children, except in the case of capital gains.

A second obstacle applies to business owners. The tax on split income (“TOSI”) taxes certain dividends and other amounts paid to family members at the top marginal rate unless a specific exclusion applies, which removes the benefit of directing corporate income to relatives in lower tax brackets. We’ll return to TOSI in the sections on salary and dividends.

Before choosing a strategy, consider these three factors. As the cases below illustrate, each points to different tools:

• What is the source of the income you want to split? Self-employment income, investment income, pension income, and corporate income each have their own rules and their own splitting strategies.
• What assets do you have, and where are they held? Funds inside a registered account, a non-registered account, or a private corporation are each treated differently for income splitting purposes.
• What stage of life are you in? The strategies that suit a couple building their careers differ from those that suit a couple already drawing on their retirement savings.

Meet our couples

To see how these strategies work in practice, meet our three couples:

Different strategies suit each couple, and as we review them below, we will flag which ones are most relevant to each couple.

How it works. A spousal RRSP is a retirement account owned by the lower-income spouse but funded by the higher-income spouse. The contributing spouse uses their own RRSP contribution room and claims the deduction on their return, while the plan and eventual withdrawals belong to the lower-income spouse. This provides a deduction today at the higher earner’s marginal rate while shifting future taxable withdrawals to the lower earner, who will likely be in a lower bracket in retirement. Over time, it helps balance the couple’s retirement income and reduce their combined tax in their later years.

What to watch out for. A contribution doesn’t create additional RRSP room; it uses the contributing spouse’s own RRSP limit, including any carry-forward room. There’s also an attribution trap: if the lower-income spouse withdraws from the spousal RRSP in the year of a contribution or in either of the two following calendar years, the withdrawal is taxed back to the contributing spouse rather than the plan holder. This makes the spousal RRSP a long-term strategy that’s best left to grow over many years.

Who it fits best. Couples with a lasting income gap who expect that gap to continue into retirement.

How it works. You cannot contribute directly to your spouse’s Tax-Free Savings Account, but you can give them funds to contribute to their own. This is a simple form of income splitting, because the attribution rules do not apply to income earned inside a TFSA. Any interest, dividends, or capital gains earned on the gifted funds grow tax-free and aren‘t attributed back. The annual contribution limit is $7,000 for 2026, and someone who has been eligible every year since inception in 2009 and has never contributed would have $109,000 of cumulative room.

What to watch out for. The strategy works only to the extent the lower-income spouse has available TFSA room, so it is worth confirming their room before contributing. Over-contributions are penalized at 1% per month on the excess until withdrawn. Withdrawals are added back to contribution room only in the following calendar year, so re-contributing in the same year as making a withdrawal can inadvertently create an over-contribution.

Who it fits best. Almost any couple with unequal incomes and unused TFSA room, at any stage of life. It’s often the first strategy to use because it’s simple and avoids attribution risk.

How it works. Because a simple gift of non-registered funds to your spouse triggers attribution on future income earned on those funds, one way to split investment income is to lend the money rather than give it. The higher-income spouse can lend funds to the lower-income spouse at the CRA’s prescribed rate. Provided the interest is paid each year by January 30, the attribution rules do not apply. The lower earner invests the funds, pays the annual interest, and is taxed on the investment income, while claiming a deduction for the interest paid. Only the interest received is taxable to the lender.

A related, more subtle opportunity is second-generation income. Although income on gifted funds is attributed back to the transferor, income earned by reinvesting that income, the “income on income,” is not. In practice, a couple can gift funds, allow the first layer of income to be attributed back, then segregate that income in a separate account where its future earnings are taxed to the lower-income spouse. This strategy requires careful tracking to implement.

What to watch out for. The loan strategy provides a net benefit when the total investment return exceeds the prescribed rate, which is 3% as of the third quarter of 2026. Because the rate can be locked in for the life of the loan, a loan made today carries a higher breakeven point than one funded when prescribed rates were lower, such as the period of 1% rates. As a result, the math is less compelling than it once was. Additionally, if an annual interest payment is ever missed, the arrangement may fall offside going forward.

Who it fits best. Couples with significant non-registered assets and a wide income gap, particularly when the expected investment return comfortably exceeds the prescribed rate at the time of funding.

How it works. A straightforward and often overlooked strategy is for the higher-income spouse to pay a greater share of the household’s expenses, freeing the lower-income spouse to save and invest more of their own income. Where the lower earner invests funds clearly traceable to their own earnings, rather than to a gift or transfer from the higher earner, the resulting investment income is taxed in their hands and not attributed to the higher earner.

Two related credit-shifting moves can reinforce the strategy. Because the medical expense credit is reduced by the lesser of 3% of net income or a fixed threshold ($2,890 for 2026), claiming the family’s medical expenses on the lower-income spouse’s return may result in a lower threshold and a larger credit. Similarly, having the lower-income spouse claim charitable donations can reduce their tax and preserve more of their after-tax income for investment. This approach makes sense when the credit is worth at least as much in the lower earner’s hands. The resulting tax savings leave them with more of their own income to invest.

What to watch out for. Keep clear records showing that any invested funds came from the lower earner’s own income.

Who it fits best. Couples where the lower-income spouse earns income of their own that can be saved and invested.

How it works. If you own a business, whether incorporated or not, you can pay a reasonable salary to a spouse or family member who works in the business. The salary is taxed in the recipient’s hands, shifting income away from the owner. For an incorporated business, the salary is an expense that reduces the corporation’s taxable income, which can be especially valuable for income that would otherwise be taxed above the small business rate.

Beyond income splitting, a salary can generate RRSP contribution room, create CPP pensionable earnings, support eligibility for the childcare expense deduction, and provide regular T4 income that lenders may view more favourably. We explore the salary-versus-dividend decision in greater detail in Compensation Crossroads: Salary, Dividends, or Both?.

What to watch out for. Salaries are not subject to TOSI, the complex rules that will be discussed in the next strategy. However, the salary must be reasonable in relation to the services actually provided. If the CRA considers it excessive, the family member may still be taxed on the income while the corporation is denied the deduction.

Paying a salary also requires making source deductions to CRA, including employer CPP, and potentially EI contributions, and more tax reporting, which can reduce the overall benefit.

Who it fits best. Business owners whose lower-income spouse genuinely works in the business.

How it works. Owners of a corporation, whether an active business or a holding company, can pay dividends to family-member shareholders, such as a spouse in a lower tax bracket. Paying dividends can also trigger a refund of certain corporate taxes previously paid on investment income, a mechanism we covered in Accumulated Assets: Tax Planning for Investments Inside Your Corporation.

What to watch out for. This is where TOSI may apply. As a starting point, assume that a dividend paid to a related person will be taxed at the top marginal rate unless a specific exclusion applies, eliminating the income splitting benefit.

Several exclusions do exist. For example, the recipient may be actively engaged in the business on a regular basis or may have been for a sufficient period in the past. The recipient may also hold “excluded shares”, generally at least 10% of the votes and value of a non-service corporation, held directly. Other exclusions may apply where the dividend represents a reasonable return given the recipient’s contributions, or where the recipient inherited the shares. Any of these exclusions from TOSI can make income splitting possible.

Another exclusion, most relevant for retirees, is the age-65 exclusion. If the business owner is 65 or older, then dividends that would be excluded from TOSI in the owner’s hands can also be split with their spouse without attracting TOSI, mirroring the pension income splitting available to other retirees. The rules are complex and fact-specific, so any dividend plan involving family members should be reviewed with a tax advisor.

Who it fits best. Incorporated business owners, particularly owners aged 65 or older who can use the age-65 exception to split dividend income with a spouse.

How it works. For retirees, two strategies require no restructuring of assets. Pension income splitting lets you allocate up to 50% of eligible pension income to your spouse by simply making a joint election each year when filing your personal tax returns. What counts as eligible pension income depends partly on age, but commonly includes registered pension plan payments and, from age 65, RRIF and annuity income. RRSP withdrawals and CPP pensions are not eligible for annual elective splitting, although CPP pensions can be shared as described below.

CPP sharing allows spouses who are both receiving their CPP retirement pensions to share their pensions in proportion to the years they lived together while contributing, which can move income from the spouse with a higher CPP benefit to the spouse with the lower one. CPP sharing is arranged through Service Canada in advance rather than on your tax return.

What to watch out for. Pension splitting is elected annually, so you can revisit the optimal amount each year. It may also affect items tied to net income such as the age credit or Old Age Security clawback among other benefits. This is part of what makes the strategy beneficial, but it can also make it trickier to optimize the amount to split. CPP sharing applies to both spouses’ pensions, so the net benefit depends on the gap between the two entitlements.

Who it fits best. Retired couples with unequal pension or registered income.

Income splitting is a matter of matching the right strategy to your circumstances: the source of income to split, the type of assets and how they are held, and your stage of life.

A couple still building their careers may look to spousal RRSPs, TFSA funding, and investing in taxable accounts using more of the lower earner’s income, or a spousal loan from the higher earner. A retired couple drawing on their assets may find tax savings in pension splitting and CPP sharing, while still benefitting from spousal loans in the right circumstances. Business owners have further options through salary and dividends, both of which come with additional complex rules to navigate.

As with most planning, the question is not whether a strategy offers a benefit in the abstract, but whether it fits your situation, and whether it continues to fit as your circumstances change. It’s worth revisiting your approach periodically with a tax advisor as your income, assets, and stage of life evolve.

How We Can Help

Our Tax and Estate Planning team works alongside your Mawer Investment Counsellor and your tax advisor to identify which income splitting strategies fit your family’s circumstances and to help you understand how to implement them correctly. Please reach out to your Investment Counsellor to discuss how we can support your planning goals.

All tax information sourced from the Canada Revenue Agency as of June 2026.