Income splitting to reduce family taxes

If you’re like most Canadians, your goal is to beat the taxman and reduce your total tax liability. But you should not only be concerned about your own tax bill – you should be looking at the total amount of tax paid by your family.

The problem is that, in many families, one spouse is the primary income earner so reducing the family’s tax burden is a difficult challenge.

In simple terms, income splitting means moving income from an individual in a high tax bracket to someone in a lower tax bracket. By having this income taxed in the hands of a lower-income individual, the total tax burden can be reduced. Let’s look at an example.

Robert currently earns $120,000 per year. His wife, Denise earns $20,000. Robert earned $10,000 of investment income this year, and since his marginal tax rate is 45% he paid approximately $4,500 in tax on that income.

What if Robert’s investments were held by Denise and that $10,000 of investment income could be taxed in her hands instead? Due to the fact that she is in a lower tax bracket, with a marginal tax rate of just 20%, she would pay just $2,000 on this investment income – a savings of $2,500!

What would you do with an additional $2,500 of cash in your pocket?