In the U.S., couples can choose to combine their income and file a single joint tax return. But no such election is allowed in Canada where the tax rules require that every individual files a return and reports his or her own income.
The idea of splitting income with a lower-earning spouse or family member is attractive, especially in the Canadian system where higher-earning individuals are taxed at a higher rate than lower-earning ones.
Depending on the province or territory, someone with a taxable income of $100,000 a year pays $7,000 to $10,000 more in personal income tax than two people who earn $50,000 each.
The Canada Revenue Agency has long had policies in place to foil attempts to shift part of one's income to someone else. Income earned by one person must generally be claimed by that person. Attribution rules tend to nullify any attempt to "split and reduce," as it were.
But there are some exceptions to those prohibitions and taking advantage of them can result in thousands of dollars in tax savings:
- CPP sharing
- Other pension splitting
- Spousal loans
- Hiring your spouse or child
- Spousal RRSPs
- Tax-free savings accounts
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Deborah MacPherson is a partner with KPMG Enterprise in Calgary.