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When you should use income splitting in Canada

Introduction

Income splitting is a tax-advantaged strategy that allows you to split the earnings from one income with your spouse or common-law partner. You can then use this income to reduce your overall tax bill. Income splitting can be beneficial for people who earn more than their spouses and want to share some of their income with them.

For example, if you’re earning $100,000 per year but your partner earns only $50,000 per year working as a teacher, it would make sense for you to share some of your earnings with them so they don’t have to pay taxes on all of that extra money at once (which would increase the tax burden).

In simple terms: if one person in a relationship makes significantly more than the other person does (“significantly” being relative), then splitting some of that higher-earning person’s income with their lower-earning partner can save both parties money on taxes

What is income splitting?

Income splitting in Canada is when a couple shares their income. This can reduce the total amount of tax paid by both spouses, or it can make one spouse eligible for tax credits (if they’re not working).

It’s also useful in situations where one spouse makes significantly more money than the other, or if one spouse stays home to care for children.

What are the rules for income splitting in Canada?

Income splitting is a common tax strategy that allows one spouse to transfer up to half of their taxable income to their partner. This can be done through either a spousal RRSP or TFSA contributions, but the latter is generally preferred since it results in a larger tax reduction for the spouse who receives the funds.

The rules about income splitting in Canada are contained within section 146 of our Income Tax Act. These stipulate that:

  • A spouse may make a cash payment (or transfer assets) totaling up to 50% of their taxable income to their partner
  • The recipient will be able to deduct this amount from their taxable income for that year and pay less tax as a result (the amount deducted must be included on line 232 of Schedule 1).

Are there any downsides to income splitting?

  • Are there any downsides to income splitting?
  • How much can I save on taxes?
  • Can my spouse or common-law partner also split their income with me?

If you’re reading this blog, you’re likely eligible for income splitting and want to know if it’s right for you. You may have heard some other people talking about how they’re getting a big tax refund after using income splitting, but don’t forget: everyone’s financial situation is different! The amount of money that can be saved through the tax rules changes year after year and depends largely on your circumstances. There are also limits on how much each spouse can contribute to their RRSPs to maximize their savings potential (i.e., up to 18% per person), so keep that in mind when doing your calculations.

If you’re sharing your life with someone who earns less than you, income splitting can make tax time more profitable.

Income splitting is a tax strategy that can help you save money on taxes. It can help you save up to $6,000 for couples and up to $2,000 for single parents, as well as up to $1,500 for seniors.

If you’re sharing your life with someone who earns less than you and are filing a joint return, income splitting can be beneficial because it allows some of your income to be taxed at your spouse’s rate instead of yours. This means that more of your combined earnings could end up with the lower-earning spouse and be taxed at their rate.

Conclusion

So, you’ve decided to try out income splitting. That’s great! It’s a great way to reduce your tax burden, and it can also make sure that both parties are contributing equally to the household. As long as both parties agree on this decision and understand what they’re getting into (especially if they don’t expect any changes in their future), then there shouldn’t be any problems with doing so. We hope this article has helped clarify some points about income splitting for couples or families who may be considering doing so themselves!

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