What is income splitting and how can it save tax?
When one spouse in a marriage or common law relationship earns considerably more than the other, income splitting may help the couple save on taxes. Since our taxation system is progressive, the more you earn the more you pay. This means more tax will be paid by a couple where one person earns $85,000 and the other $15,000 than by a couple where each person earns $50,000. One obvious income-splitting technique is the spousal RRSP. Here the higher-income partner buys an RRSP in the spouse’s name and then claims the tax deduction. When the plan is cashed in, the lower-income partner must claim the funds as income. Check the details before adopting this approach since some restrictions exist. If the higher-income spouse has contributed to the plan within the past three years, the redeemed funds will be considered taxable income for that spouse.
