INCOME SPLITTING

In Canada, individuals file tax returns, not couples. Because of our progressive tax system, tax rates go up as your income goes up. So if one member of a couple makes a lot, and the other very little, they pay far more tax than if the income were evenly split between the two individuals. A simple example will highlight the difference.

• John and Mary Oldfashion. John has a taxable income of $120,000 per year and Mary has no taxable income. Their total family tax bill is $36,719.
• Bill and Jane Evensteven. Both Bill and Jane each have a taxable income of $60,000 so there total family income is the same as John and Mary. But their total family tax bill is $25,224 which is $11,495 less than John and Mary’s total tax bill. That's a huge difference.

There are many ways to split family income, but CRA also has many rules that limit income splitting. There are basically three kinds of income splitting: 1) income splitting before retirement 2) income splitting after retirement and 3) income splitting after death.