There are a good portion of families that have lop sided incomes between spouses. That is, one spouse makes significantly more income than the other. At a high level, money is money. However, if you look a bit deeper, spouses with lopsided incomes pay higher overall tax than spouses with equal income.

For example, if an Ontario family has a single earner making $100k would pay approximately $26.5k income tax (including spousal credit). Another family with both spouses making $50k each would pay a total of approximately $19.4k income tax.  Both families have the same total income, but one family has an extra $7k in annual cash flow.

As well, when investing in a non-registered account, the taxation is attributed back to the person who funded the account.  There are some tax strategies that can be implemented to reduce the extra taxation. Some of these include:

Tax Free Savings Account (TFSA)

One of the perks of the new tax free savings account (TFSA) is that the higher income spouse can contribute to the lower income spouses TFSA without any tax implications.  That is, the lower income spouse receiving the TFSA contribution gift can do whatever he/she pleases with the money without having to worry about the timing and taxation when withdrawing from the TFSA (unlike a spousal rrsp, see below).

Separate Accounts

As mentioned above, non-registered investment taxes get attributed back to the person who funded the account.  So in the case of one spouse making significantly more than the other, it’s more than likely that the investment taxes would be taxed in the hands of the spouse receiving the higher income.  If you’re in this situation, there is a solution to this problem.  Keep separate chequing accounts, and use the higher income spouse to pay all of the household expenses.  Then use any cash left over from the lower income spouse to invest.  This will help ensure that investment gains will be taxed at the lower rate.

Loan Money to the Lower Income Spouse

If the higher income spouse has a large lump sum to invest, instead of investing it him/herself, the money can be loaned to the lower income spouse to invest with.  As a result,  the lower income spouse will pay the interest (tax deductible) and pay the investment tax at a lower rate.  According to Tim Cestnick, the current CRA prescribed rate for spousal loans is 1% – the lowest ever.

Spousal RRSP

A spousal RRSP will allow the high income earner to contribute to a spousal RRSP while claiming the tax deduction for him/herself.  The real benefit of this strategy is that it helps even out the incomes during retirement.  This in turn will reduce the overall family taxation.

More details on the spousal RRSP here.

Pension Splitting

This is another retirement income splitting strategy where pensions can be split to reduce family taxation.  Pensions like registered pensions, Canadian Pension Plan (CPP), Registered Retirement Income Fund (RRIF), and annuities all qualify for pension splitting.

Do you and your family practice any income splitting strategies?  If so, I’d like to hear about them in the comments.

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