To Split or not to Split…That is the question.
Income Splitting Strategies
So what is Income Splitting, and who is eligible to quality for the benefit?
Income Splitting is a way for families to split up their income so that if one spouse earns more than the other, the higher-earning spouse can allocate some of their income to their lower-earning spouse’s tax return. Since our tax system has graduated tax brackets, Income splitting is a great strategy to pay less household tax, and keep more money in your pocket!
To benefit, you must have a child who:
- is under 18 at the end of the year, and
- ordinarily resides with you or your spouse or common-law partner throughout the year
The combined federal tax reduction is equal to what you would save if you were to transfer to your lower-income spouse the lesser of:
- $50,000, and
- ½ x (your taxable income – your spouse’s taxable income)
The resulting savings can be claimed by either spouse in the form of a federal non-refundable tax credit, to a maximum of $2,000. As a result, this measure can reduce your federal taxes only – not your provincial or territorial income tax. *
Another more traditional form of income splitting is the ability to split up to half of your pension income with your spouse. Any pension income that qualifies for the $2,000 federal pension income credit also qualifies to be split. Specifically, this would include annuity-type payments from a Registered Pension Plan (RPP), regardless of age, and also includes Registered Retirement Income Fund (RRIF) or Life Income Fund (LIF) withdrawals upon reaching age 65.*
Spousal RRSPs (RRIFs)
If you think that, upon retirement, you will have a higher income or have accumulated more retirement assets than your spouse, it may be beneficial for you to contribute to a spousal RRSP. A spousal RRSP is an RRSP to which you make the contributions, but of which your spouse is the annuitant (owner) of the plan. It is often used to accomplish post-retirement income splitting since withdrawn funds are taxed in your spouse’s (the annuitant’s) hands instead of yours (the contributor’s). A spousal RRIF is the continuation of a spousal RRSP. *