You can save tax by diverting income to a family member in a lower tax bracket, subject to the attribution rules. Using separate bank accounts makes auditing easier.

Here are income splitting approaches your accountant may recommend

1. employ the lower income spouse
2. increase the investment base of the lower income spouse
3. make a loan to the lower income spouse
4. make transfers at fair market value to the lower income spouse
5. make contributions to the RRSP of the lower income spouse
6. assigning CPP benefits to the lower income spouse

Employ The Lower Income Spouse

• in a sole proprietorship or private corporation, the higher income spouse can employ the lower income spouse
  • compensation must be reasonable for the services performed
  • can be in the form of a consulting fee: self-employment income allows writing off expenses

Increase The Investment Base of the Lower Income Spouse

• the higher income spouse pays the household expenses and income tax for the lower income spouse
• the lower income spouse has more income to invest
  • lower tax bracket → greater after-tax growth and income

Note: the higher income spouse can only pay interest on investment loans made to the lower income spouse by a third-party

• no income attributed
• lower income spouse deducts loan interest

Make A Loan To The Lower Income Spouse

• no attribution when property or funds loaned if

1. loan interest at the CRA prescribed rate and
2. loan interest paid

• return > loan rate → excess yield → lower income spouse

Transfers At Fair Market Value

• transfer assets which are expected to grow or produce income at fair market value
  • attribution rules do not apply
• lower income spouse taxed on future growth and income

Contribute To The RRSP Of The Lower Income Spouse

• higher income spouse contributes to the RRSP of the lower income spouse (subject to normal contribution limits)
  • gets tax deduction
• withdrawals are taxable to the lower income spouse, who should remain in a lower tax bracket
  • contributions are taxed to the contributor if withdrawn by the recipient spouse in the year of contribution or the next two calendar years

Assign CPP Benefits

• the higher income spouse can direct up to 50% of their own CPP benefit to the lower income spouse if both spouses are age 60+
• beneficial if the lower income spouse has low or no CPP benefits
• note: a portion of the recipient spouse's income is transferred back