What's still allowed, what was closed off in 2018, and how to legally shift income within your family to reduce taxes.
Income splitting — shifting income from a higher-taxed family member to a lower-taxed one — is one of the most powerful tax reduction strategies available to Canadian families. However, Canada significantly restricted income splitting in 2014 and 2018 with the Tax on Split Income (TOSI) rules. This guide explains what's still allowed, what's been closed off, and how to use remaining strategies effectively.
Canada has a progressive tax system — the more you earn, the higher your marginal tax rate. A family where one spouse earns $150,000 and another earns $0 pays far more total tax than a family where both earn $75,000, even though total family income is identical. Income splitting reduces this disparity by legally moving income to lower-bracket family members.
| Federal Marginal Rate (2025) | Income Range |
|---|---|
| 15% | Up to $57,375 |
| 20.5% | $57,376–$114,750 |
| 26% | $114,751–$158,519 |
| 29% | $158,520–$220,000 |
| 33% | Over $220,000 |
Moving $50,000 of income from the 33% bracket to the 20.5% bracket saves approximately $6,250 in federal tax alone — plus substantial provincial savings.
The TOSI rules (expanded in 2018) tax split income received by adult family members at the highest marginal rate, eliminating the benefit of shifting income to lower-bracket adults in certain situations. TOSI primarily targets:
The most widely available income-splitting strategy for employed Canadians. The higher-income spouse contributes to a spousal RRSP using their own deduction room. The contribution reduces the contributor's taxable income now. After a 3-year attribution period (end of the second calendar year after the last contribution), the lower-income spouse withdraws at their lower rate in retirement.
Best for: Couples with significant income disparity expecting different income levels in retirement.
Tax saving example: Contributor deducts at 43% combined marginal rate; spouse withdraws at 25% combined rate = 18% permanent tax saving on the funds.
Up to 50% of eligible pension income can be allocated to a spouse on the tax return without any actual money transfer. Eligible pension income includes:
Pension splitting is a paper election done on Form T1032. It remains one of the most powerful and straightforward tax strategies for retired Canadian couples and can save $3,000–$100+ annually for couples with large pension income disparities.
The higher-income spouse loans money to the lower-income spouse at CRA's prescribed interest rate (currently 5% in 2025 — check CRA quarterly). The lower-income spouse invests the loan proceeds. Investment returns above the prescribed rate are taxed in the lower-income spouse's hands. The higher-income spouse reports the interest received as income.
Requirements: Written loan agreement, actual payment of prescribed interest by January 30 each year, careful tracking. Professional guidance recommended.
Paying a reasonable salary to a spouse or adult child for actual work performed in a family business is legitimate income splitting. The salary must be reasonable for the work done — comparable to what you'd pay an unrelated employee for the same role. The business deducts the salary; the family member pays tax at their lower marginal rate.
While investment income earned on money gifted to minor children is attributed back to the parent (the "kiddie tax"), capital gains earned by a child under 18 are generally taxed in the child's hands (not attributed). This creates a limited opportunity: gifting funds to children to invest in growth-oriented assets where gains are capital in nature.
Couples where both partners are receiving or will receive CPP can share CPP retirement benefits. The combined CPP is divided proportionally based on the period of cohabitation. This differs from pension income splitting — it's an actual redistribution of CPP credits and permanently affects each individual's CPP entitlement.
The Family Tax Cut (which allowed couples with children under 18 to notionally transfer up to $50,000 of income between spouses) was eliminated effective 2016. It no longer exists. Don't confuse it with pension income splitting, which remains fully available for retirement income.
Reducing the higher-income spouse's net income through RRSP contributions and spousal RRSPs also increases the family's Canada Child Benefit entitlement. The CCB phases out based on family net income — lowering the higher earner's net income can restore meaningful CCB dollars. This amplifies the effective return on RRSP contributions for families with young children.
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Get KOHO Free — Use Code 45ET55JSYAIncome splitting options for Canadian families were curtailed by TOSI rules, but meaningful strategies remain. For most employed families: use spousal RRSP contributions during working years to equalize retirement income, then use pension income splitting in retirement. Business owners need professional advice on what remains available post-TOSI. The savings from systematic income splitting over a lifetime can easily total $50,000–$150,000 in permanently avoided taxes.