The Bridgeable Gap What is Income Splitting and How Does It Help
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The Bridgeable Gap: What is Income Splitting and how does it help?
In a world of seemingly endless uncertainty for your wallet and buying power – high inflation, high interest rates, tariffs – it is important to focus on the things we can control. One way to boost one’s current and future income and wealth is to split income with your spouse.
What is Income Splitting?
Income splitting is a tax-planning strategy that shifts taxable income from the higher marginal tax rate spouse’s hands to the lower marginal tax rate spouse’s hands, taking advantage of their lower marginal tax rate. Canada has a graduated income tax system meaning as Canadians earn more, they pay a higher rate of tax on the higher earnings. The effect of a graduated tax system is that spouses who each earn $200,000 ($400,000 combined) will pay less total tax than spouses who earn $350,000 and $50,000 ($400,000 combined). This is where income splitting with the goal of equalizing taxable income as much as possible can be beneficial. Generally, income splitting works best when one spouse earns substantially more income than the other, so the tax savings are greater.
For example, in Ontario and in 2025, taxable income up to $52,886 is taxed at a rate of 19.55% while taxable income over $253,414 is taxed at a rate of 53.53%. Moving $10,000 in taxable income from the spouse with income over $253,414 to the spouse with income under $52,886 therefore saves this household upwards of ~$3,400. Over a lifetime, savings of this magnitude or higher, can really add up!
There are more complex income splitting strategies (e.g. utilizing family trusts, corporations, etc.) that can involve children and grandchildren, but we will focus on spousal income splitting strategies in this article.
Who is Eligible for Income Splitting?
For spousal income splitting strategies, you need to be:
- Canadian tax residents
- Married or in a common-law relationship (living together for at least 12 continuous months), and
- Not separated for more than 90 days during the year due to relationship breakdown
What Are Some Common Income Splitting Strategies?
Have the higher income spouse pay for family expenses like food, clothing, and mortgage payments while the lower income spouse accumulates savings and invests in their name alone. This allows more household investment income to be taxed in the hands of the lower income spouse and at a lower tax rate.
Have the higher income spouse loan funds to the lower income spouse to invest. A higher income spouse can loan an unlimited amount of money to a lower income spouse as a prescribed rate loan. The higher income spouse is obligated to charge interest based on when the prescribed rate loan was originated. In Q4 2025, the minimum interest rate for prescribed rate loans is 3% and the interest paid to the higher income spouse is taxable as interest income. If the lower income spouse can generate a rate of return greater than 3% in their name, overall household taxation may be lower, depending on the type of investment income generated by the lower income spouse.
Have the higher income spouse contribute to a spousal RRSP. Higher income spouses can contribute to a spousal RRSP, benefit from the income tax deduction against their higher taxable income, and their lower income spouse is taxed on any withdrawals from this spousal RRSP in future, subject to the 3-year attribution rule (i.e. no withdrawals within 3 years of the last contribution or the withdrawal is attributed back the higher income spouse). This allows the household to benefit from tax deductions at high tax rates when funds are contributed to the spousal RRSP as well as move more future taxable income in the form of RRSP withdrawals to the lower income spouse who is taxed at a lower tax rate.
Have the higher income spouse provide funds so that the lower income spouse can contribute to their TFSA. Spouses are allowed to provide funds for contributions to their partner’s TFSA. Doing so allows the lower income spouse to accrue assets in their name using funds previously in the hands of the higher income spouse.
Look to split eligible pension income in retirement. If you are over age 65, certain forms of income like employer pensions, RRIF withdrawals and a portion of U.S. Social Security payments can be split with your spouse in the year they are received. Splitting an employer pension or RRIF withdrawal can unlock the pension income tax credit if one spouse does not have eligible pension income in that tax year, which allows for a deduction of up to $2,000 in pension income. Important planning is required around CPP benefits, which can be split at the time you apply for CPP benefits, but not in subsequent years similar to the aforementioned income types. Careful planning is also needed for accounts like U.S. 401(k)s, 403(b)s, and 457(b)s because income received by these plans is splittable but income received by IRAs is not.
If you’re a business owner and your spouse is active in the business, you may be able to establish them as a bona fide partner and share in the profits and losses of the business. To do this your spouse must either devote a significant amount of their time, skills, or training to the business or must have invested their own capital in the business. Your spouse’s share of income must be reasonable compared with the amount of work or capital put into the business. Income can be split more effectively over time this way rather than one spouse receiving all of the profit and loss generated by the business and one spouse receiving a fixed salary.
Note that due to CRA’s attribution rules, you cannot simply transfer funds into your spouse’s name. Income splitting between spouses needs to be done via one of the methods outlined above.
Income splitting, like all other financial planning endeavours, is not static and requires continuous review. It is recommended that income splitting strategies are reviewed annually, if not more frequently if one’s income is variable. Furthermore, planning to optimally split income in retirement may require years if not decades of financial planning so is something to be reviewed well before retirement.
At Steele Wealth Management, income splitting is part of our broader income planning work, and we look to maximize your household after-tax income not just in the current year but over your lifetime.
News and our views
Canada Looks to Break Down Interprovincial Barriers to Boost Growth and Harden the Canadian Economy Against U.S. Trade Wars. One of the lowest hanging fruits to boost Canadian GDP and employment is reducing provincial trade barriers, many of which come with a cost and little to no benefit for either the provinces or the nation. On June 26, 2025, Bill C-5 aka the One Canadian Economy Act received Royal Assent. This bill aims to reduce interprovincial barriers to trade and employment and speed up construction projections by allowing them to bypass certain regulations if deemed in the national interest. All provinces have taken some steps towards (detailed in the table below) removing trade barriers including the outright removal of select exceptions to the Canada Free Trade Agreement (CFTA), removal of exceptions for reciprocating jurisdictions in some cases, and in the case of Ontario, the introduction of direct-to-consumer sales of alcohol.
Our Take: Some provinces claim that removal of all provincial trade barriers could boost GDP by $200 billion annually, or roughly 6% of GDP. Perhaps a more realistic number can be found in a 2017 Bank of Canada study that showed a 10% reduction in interprovincial trade barriers would results in a 0.2% boost to GDP, inferring that the eradication of provincial trade barriers would boost GDP by ~2% annually. As we see in the table above, many provinces have only selectively removed exceptions to the CFTA and others have only provided trade barrier relief to provinces that also provide trade barrier relief. As a result, many trade barriers remain intact and the GDP or employment boost from these actions may be far lower than many hope. That said, any reduction in trade friction within the Canadian economy helps make the Canadian economy stronger and our labour markets more resilient. The charts below show which regions (Atlantic Canada and the Prairies) and which sectors (miscellaneous manufactured products, energy, financial services) will benefit the most as interprovincial trade barriers are reduced.
Higher Military Spending Could Boost GDP Over the Next Decade or More. Military spending hit an all-time high in 2024 after the war in Ukraine jolted Western nations to reprioritize spending on defense and replace/upgrade military equipment that was sent to Ukraine. Nations that are proximal to and have tense relations with Russia – Poland, Estonia, Latvia, Lithuania, Finland, Denmark – hiked military spending the most over the past two years, as a percentage of GDP. NATO members have agreed to allocate 5% of GDP to military spending by 2035, an increase for all members and more than double 2024 military spending for all but six of the thirty-one NATO members (NATO member military spending as a percentage of GDP from 2022-2024 can be seen below).
Our Take: Investors have taken politicians at their word and have driven European defense stocks like Germany’s Rheinmetall AG, Italy’s Leonardo SpA, France’s Thales, and the UK’s Rolls Royce and BAE to convincing all-time highs. With the current frontlines in Europe/Asia, an increase in European military spending is seen as more than just talk and is expected to rise the most, benefiting European defense stocks more than others. That said, German tank-maker Rheinmetall trading at ~8x trailing sales looks steep relative to U.S. tank-maker General Dynamics trading at less than 2x trailing sales so investors are betting on a historic buildup of European defenses never seen outside of world-wartime. While investing in defense stocks may be somewhat speculative at this stage, especially for those operating in Europe, any incremental investment in defense should support GDP growth and could benefit more than just the defense sector.
Just for fun
- Hard to write a better movie script than this! In mid-October, the Louvre was hit by a seven-minute heist in broad daylight as thieves entered the building using a furniture lift, threatened guards, smashed display cases, and fled with eight priceless Napoleonic jewels including crowns, diadems and brooches belonging to 19th century royals and empresses. Investigators quickly began to survey the crime scene and were able to capture one thief as they attempted to flee France, connecting the thief to the crime using DNA evidence. Officials have yet to say whether any stolen jewels have been recovered, though they have previously expressed concern that the spoils have already left the country.
- All (Canadian) eyes are on the Toronto Blue Jays this October. Heading into game 3 with the best of seven series tied 1-1, the Jays are the technical underdogs with bookmakers giving them a 1-in-3 chance of taking home the MLB’s Commissioner's Trophy. Technicalities be damned, bring it home boys! Let’s go Blue Jays!!
