Income-Splitting & The Attribution Rules

As you build a larger portfolio, the income tax burden will also increase. One longer-term income-splitting strategy is to have the tax-exposed income attributed to a spouse in a lower tax bracket. There are attribution rules to prevent us from simply gifting money to do that. Learn how they work – and how you can build your lower-income spouse’s hoard legitimately to income-split without running afoul of them.


Hoards Attract Tax Hobbits


It takes money to make money.

Building a large nest egg is similar to how a dragon grows its hoard of jewels, gold, magical items, and the skulls of vanquished foes. It takes having some treasure to grow more. In the case of a dragon, a large pile of treasure attracts brave adventurers who usually bring with them more treasure to add to your pile and more bones to lay on after having had a quick meal.


A large hoard also attracts the undesirables.

The problem with accumulating a mountain of treasure is that it gets harder to defend from the sneaky little creatures that will inevitably come and nibble away at the edges. Hobbits are famous for this. They are stealthy, have hairy feet, and live a generally leisurely life that revolves around multiple meals per day, smoking weed, and living off of the bounty of the Shire. Any resemblance to real persons is purely coincidental.

income splitting
A hobbit burglar, Trodo Baggins, seen sneaking into the dragon’s treasure chamber in The Desolation of Smaug.

Dividing up your treasure pile with a mate makes it easier to grow and defend.

Intermediate-term income splitting strategies are aimed at evenly distributing income between partners in the years before turning age 65. That minimizes tax drag both while building up the treasure hoard and also when eventually drawing upon it.

These techniques revolve around building up an investment portfolio to generate income taxed in the hands of a lower income spouse. One method is with spousal RRSPs, as just reviewed. However, those with a larger portfolio may need more room than an RRSP can provide. Plus, there are advantages to using a mix of TFSAs, corporate, and non-registered “taxable accounts” as part of your comprehensive investment plan.

When an intermediate-term income-splitting strategy helps.

There are several situations where having an intermediate-term income-splitting plan may be important. You are planning for situations far in the future, but that requires action now. It takes many years to gradually build up a tax-diversified portfolio.


A current difference in tax rates.

If your income and your spouses’ income now are in radically different marginal tax brackets during your asset building years, then having investment income attributed to them means more after-tax money. You may not access that money right now. However, that tax-drag affects your portfolio growth. Less tax on interest and dividends means that you can re-invest more. A small tax-drag difference is not so small when it compounds over a long timeframe.


Different tax rates in retirement.

Having more investment income taxed in a lower-income spouse’s hands will reduce the tax-bill, if your projected income in retirement will be higher. That could be an issue if most of your retirement nest egg is within a corporation, and you cannot income-split with dividends. It could be important if the high-income partner has a large pension.

These considerations are most important if you plan on retiring before age 65. After 65, income splitting via pensions, RRSPs, and CCPCs (professional or private corporations) becomes easy again.


With a large corporation, a taxable account may help to remain tax efficient.

A private corporation that is functioning efficiently can be very tax efficient. However, there are measures built into the tax code to prevent us from simply using a corporation as massive tax-deferred investment vehicle.

One is the refundable dividend tax on hand (RDTOH). Investment income is taxed at approximately the highest personal rate upfront. That tax gets refunded to the corp when you pay yourself dividends (and pay personal tax). If your corporation is receiving large amounts of interest and dividends, then you must also pay out dividends to keep it efficient. If you must pay out more than you need to max your RRSP/TFSA and fund your lifestyle, then the next place to park money is a personal taxable account.

In 2018, the government also introduced the active-passive income limits. These rules kick in with passive income in the $50-150K/yr range for corporations otherwise eligible for the low small business tax rate. This again forces you to move money out as salary, to reduce corporate income, or accept a massive tax hike. If you don’t need that extra salary, want to invest it, and your registered accounts are full – a personal taxable account is the place to put it.

If forced to invest in a taxable account to keep your corporation tax-efficient, then doing that in a lower personal tax bracket is obviously better.


When you are not incorporated and invest more than your RRSP/TFSA room.

An incorporated professional may be forced to use a personal account if their corporation gets large. An unincorporated professional has no choice from the get-go. A salaried high-income professional still likely took many years to get where they are. Hence, they often must save more aggressively than the RRSP and TFSA room limits allow to make up for lost time. This makes building a tax-efficient plan for personal non-registered accounts vital.


To give tax diversification for retirement or the big spends before then.

A corporation, RRSP, and taxable account all have different tax liabilities baked into them. RRSP withdrawals are income, a corporation pays taxable dividends, and a taxable account has unrealized capital gains. Having multiple accounts to draw from allows for better tax-planning in retirement.

There may also be times when you want to spend some money before then. For example, when the markets were doing well and we wanted to buy an RV, we used money from my wife’s taxable account. Very little tax consequence compared to taking money from our corporation.

Another benefit of diversifying your tax liabilites is if the tax rules changes. We have already seen that with corporations in recent memory.

How big of a difference could it make?

Let’s look at a quick example. Say, you are a specialist physician and drawing an income of $400K/yr while your spouse makes 50K/yr. You have a low cost of living. So, you can live off of a fraction of your income while still maxing out your RRSP, TFSAs, and leaving some money in your corporation.

Your high-savings rate in the corporate account and low spending mean that you will hit the passive investment limits or trap RDTOH within the decade. You could cut back working at that point, but will still be pretty young and not ready to do so. Being proactive, you could also invest 50K/yr in a taxable account in an ETF tracking the TSX earning an average of 5%/yr capital gain (which you don’t trigger extra tax by cashing in) and 2.6%/yr of eligible dividends. That is pretty tax efficient.

After 35 years you would have $6.3M if invested in your taxable account compared to $7.2M if invested by your spouse instead. Almost a $1M difference. That is a pile of loot, even when you adjust it down for 35 years of inflation.

This is with the lower earning partner earning $50K/yr. It is even more dramatic if they have little or no income. This model is also assuming that you did not realize any capital gains over the accumulation span. If you did (most do), then that would have triggered tax events. Those would have a much greater detrimental impact taxed in the higher income spouse’s hands.

The Dreaded Attribution Rules

The CRA Warrior wielding the legendary Sword of Attribution could be sent on a quest for your treasure.

Gifts in Canada are generally not taxed. However, to prevent tax avoidance from high earners gifting money or capital property (like real estate or stocks) to their lower earning family members to generate income from, we have the “attribution rules”. This applies to a spouse or a minor child/grandchild/niece/nephew). Notably missing from the list are parents and siblings.

These rules ensure that income generated from such gifts is attributed to the higher-earning spouse and taxed at their higher rates. Let’s look at a few examples.


Gifts to a Spouse

  • If you give money, stocks, or a rental property to a lower income spouse, then any income (dividends, interest, rent, royalties) will be attributed to you and taxed at your rate.
  • If the property gains in value from time of purchase, all those capital gains will be attributed to you.
  • You can avoid some of the gains being attributed to you if you file a special election with your tax return for the year that the gift is given. That special election would result in you paying capital gains on any increase in value to that point as if you had sold it to your spouse at fair market value (FMV). If it appreciates further after that, then your spouse would only pay capital gains tax on the increase above that FMV.
  • Another notable nuance: Income generated from the income (second generation income) is not attributed. More on this in a follow-up post.

Gifts to a Child, Grandchild, Niece, or Nephew

  • The gift is considered to be sold by you at FMV when given.
  • If the recipient is a minor (under 18), then you have to report any income (dividends, interest, rent, royalties) generated by the asset and it is attributed to you. Once they turn 18, the income can be attributed to them.
  • A notable exemption: capital gains are taxed in the hands of the recipient rather than the contributor.

Loans Instead of Gifts

  • If you make a low or interest-free loan to a spouse or minor, then income from whatever is purchased with the loan is attributed back to you.
  • Exemption: If you make the loan at the CRA prescribed rate (3% in October of 2022) and the recipient pays that interest from their own funds, then the attribution rules do not apply. The person making the loan must claim the interest collected s income and pay tax on it. You also need appropriate legal documents and record keeping. We’ll delve into this one in another post.
  • If your spouse or minor child obtains a loan based only on the strength of your guarantee for the loan, then the attribution rules apply to income generated by assets purchased with that loan.

Depressed or worried yet? Don’t be. Time to “Dragon-up”.

The thing is, dragons are legendary not only for their greed. They are also characterized as being lazy and liking to simply slumber laying on their treasure heap. Most professionals and other successful people in my experience are not particularly greedy or lazy. Most of us did not simply find or inherit treasure.

Dragons have plenty of natural weapons at their disposal to eat burglars and even cook them up a bit first. We have strategies that we can use to prevent the CRA Warrior from using Attribution against us.

There are some good income-splitting options that we may have regardless of whether our lower-income spouse earns their own income. We can open a spousal RRSP for them. A higher-income spouse can max out their lower-income partner’s TFSA without tax consequences.

However, to take full advantage of intermediate-term income splitting techniques with your spouse, they need some treasure to attract more for their pile.


When a lower-income spouse generates income, it is precious.

To invest and grow income attributed to them, it must be clear that it was their own money invested. So, they need to generate some income of their own. That could be working for your company or other people.

That income needs to be preserved so that it can be leveraged. So, the higher-income spouse should pay all costs of living to preserve the low-income spouse’s money to invest. If you are concerned about equal spending in case of a break-up. Don’t be. Everything that you build together while married or common law is split 50:50. Better to split a bigger pie.


Keep it clean. Like your toothbrush.

To keep the income source clean, it needs to be isolated from your joint income and assets. It cannot be soiled or tainted by contact with you. Like toothbrushes.

Your income and your costs of living should go into and out of a joint bank account. This money can also be used to fund both TFSAs and the higher-income spouse’s personal RRSP or a spousal RRSP (contributed to by high-income and ownd by the low-income spouse).

The lower-income spouse’s income should go into their own personal bank account. That money can be used to fund their personal RRSP. A personal RRSP cannot be funded by someone different from the person who earned the income that generated the RRSP room. Excess money can then be invested in a personal taxable cash account solely in the lower-income spouse’s name.

Advanced loan techniques for income-splitting.

The thing is, if you start poking a dragon sleeping on its treasure, it may wake up. Now that we have awoken, let’s flex our talons, light the fire in our bellies, and get serious about defending our hard-earned money. There are more advanced techniques that you can use to increase income-splitting using loans.

With the foundation laid in this post, we will also examine how to use a spousal loan or leverage our home equity as even more tricksy techniques to income split in the next few posts.

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