The article “How Canadians can split their income and lower their tax bills” was originally published in Financial Post on September 8, 2022. PHOTO BY CHLOE CUSHMAN/NATIONAL POST ILLUSTRATION FILES.

Jason Heath: There are ways to pay less tax during your working years and in retirement

Canadians file individual tax returns and pay tax at progressively higher rates as income increases. Some countries, such as the United States, allow couples who are married and who file jointly to save tax if one spouse earns significantly more than the other and their incomes are combined. While Canada’s laws on income splitting are not as generous, there are a few strategies that taxpayers here who are single, married or have children can pursue to split income and lower their tax bills.

Taxpayers who work for themselves have unique opportunities to split income that are not available to employees. For one, they can employ family members and pay them a tax-deductible salary. This can be advantageous when they have family members whose incomes and tax rates are lower. A taxpayer can deduct the salary from taxable income just like other business expenses.

A salary paid to a spouse or child is deductible if it meets three conditions. First, the salary is actually paid to them. The work they do must also be necessary for earning the business income. Lastly, it must be reasonable given their age, and in line with what you might pay someone else. The salary should be reported on a T4 slip just as you would for another employee.

Business owners can split income with a corporation by incorporating their business. When a corporation earns income, you only pay personal tax on the income that is paid out personally as either a salary (as an employee) or as a dividend (as a shareholder). Business income that is left in a corporation and not withdrawn from personal use is only subject to corporate tax.

Small business income tax rates for a corporation range from 10 per cent to 12.2 per cent depending on the province or territory. By comparison, the top personal tax rate in Canada is as high as 54.3 per cent. This means when you split income with a corporation, you can defer up to about 40 per cent tax on that income. This higher after-tax income can be used to reinvest in the business or to invest in stocks, bonds, mutual funds, exchange traded funds, real estate, or other investments in a corporate investment account.

Until 2018, it was possible for business owners to split income with adult family members by paying them dividends on shares they owned of a corporation. Beginning that year, tax on split income (TOSI) rules came into effect and made it more difficult to pay dividends to family members. Split income paid from a corporation is taxed at the highest tax rate unless certain criteria are met. One of the most common exceptions is when a family member who owns shares of the corporation works at least 20 hours per week on average for the company. In this case, dividends can be paid to them and taxed to them without the punitive TOSI rules applying.

Pension planning

Workers with pensions can split their eligible pension income with their spouse or common-law partner in retirement. However, there is a difference between defined-benefit (DB) and defined-contribution (DC) pension plans.

Workers with DB pensions that receive a calculated monthly benefit in retirement can split up to 50 per cent of their pension with their spouse or common-law partner on their tax return. The amount can change from year to year and the ability to split income can help a couple to pay the least amount of combined tax.

Workers with DC pensions that invest in mutual funds to provide a future retirement income have restrictions on their ability to income split. If the DC pension is used to buy an annuity or provide another lifetime retirement benefit, the income may be eligible to split with a spouse or common-law partner without restriction. Otherwise, a DC pension must be converted to a life income fund (LIF) or locked-in retirement income fund (LRIF) depending on the federal or provincial pension legislation for the plan. Although withdrawals can generally be taken from a LIF/LRIF at 55, the income cannot be split with a spouse or common-law partner until the accountholder’s age 65.

Workers who contribute to the Canada Pension Plan (CPP) can apply for a retirement pension as early as age 60. CPP allows a recipient and their spouse or common-law partner to apply to split their pensions by completing a CPP pension sharing form. The CPP earned by the couple based on contributions made during the years they lived together will be divided equally between them. This may result in tax savings if there is an income differential.


Like DC pensions that are converted to LIF/LRIF accounts, registered retirement savings plans (RRSPs) that are converted to registered retirement income funds (RRIFs) do not qualify for pension income splitting until the year the accountholder turns 65. RRSP withdrawals do not qualify for pension income splitting unless the account is converted to a RRIF either.

RRSP contributions provide a method to split income today and in the future. If spouses have a significant difference in incomes, RRSP contributions should be made by the higher income spouse. RRSP deductions will reduce the higher income spouse’s income and leave the other spouse’s income to be taxed at a lower tax rate. One exception to this rule could be if the lower income spouse has a matching contribution for a group retirement plan with their employer. The benefit of the match may exceed the tax differential between the spouses.

If a couple is concerned about having all the RRSP assets in one spouse’s name, the higher-income spouse can contribute to a spousal RRSP for the other. A spousal RRSP is an RRSP that one spouse contributes to but is owned by the other spouse. The spousal RRSP owner can take withdrawals in the future that are taxable to them, subject to a three-year time limit that may cause withdrawals to be taxable to the contributor.

Non-registered investments

If someone has maxed out their RRSP and tax-free savings account (TFSA), there may still be income-splitting options to consider. If married, the higher-income spouse’s income can be used to fund living expenses while the lower-income spouse saves some or all of their income. By having the lower-income spouse build non-registered assets, the investment income will be taxable to them at their lower tax rate.

A higher-income spouse cannot just give money to a lower-income spouse to invest to save tax. The income and capital gains would be subject to attribution and taxable back to the gifting spouse.

Money can be loaned to the lower-income spouse to invest as long as the loan is made at the Canada Revenue Agency (CRA) prescribed rate in place at the time of the loan. That rate is currently two per cent, but is set to rise to three per cent in the fourth quarter of 2022.


Money can be gifted to a minor child to invest and only the income (interest and dividends) is taxable back to the parent. The capital gains, however, are not taxable to the parent and can be realized in the child’s name. If a child has no other income, capital gains between $16,962 and $28,796 can be triggered tax free each year.

Taxpayers with significant non-registered assets into the hundreds of thousands of dollars could consider establishing a discretionary family trust. By loaning money at the CRA prescribed rate to a family trust with children, grandchildren or other family members as beneficiaries, income can be shifted to those with lower incomes, some of whom may have little to no income or tax to pay.


There are ways to pay less tax during your working years and in retirement. It may be easier to split income for those with a spouse or children, but even single people with no kids of their own may have options to consider.

You can only spend or save what you keep after tax, so by considering ways to legitimately lower your tax payable, you can become more financially independent or have more money to provide for your family.

Jason Heath is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. He can be reached at