Income splitting as a tax planning strategy – Part 2
Note that any reference to “spouse” in this article also refers to a common-law partner.
The strategy of income splitting takes advantage of our progressive tax system where as an individual’s taxable income increases, their marginal tax rates increase.
A sound income-splitting strategy enables spouses to shift income from a higher income spouse to a lower-income spouse. Simply gifting cash to a lower-income spouse for investment purposes is not an effective plan as the income attribution rules will likely apply.
These rules will result in any first generation investment income earned on the cash gifted to attribute back to the higher income spouse for tax purposes.