Strategies for Income Splitting with a Spouse Within Attribution Limits

In Part 1 of our blog series, we introduced the concept of attribution rules and how they impact income transfers between family members—spouses (or common-law partners), minor children, adult children and others. We also clarified how these rules differ from the provisions for the Tax on Split Income (TOSI). If you haven’t read that post or would like a refresher, we recommend starting there before diving into the strategies discussed here.

Part 1 – Understanding the Basics of Attribution Rules

Now that we’ve laid the groundwork, let’s focus on how to legitimately split income with your spouse while staying within the boundaries of the attribution rules. Although the rules limit direct transfers of income or assets, several innovative, CRA-compliant techniques allow high-income-earning families to reduce their overall tax burden, and business owners and professionals commonly use them.

As discussed above, the attribution rules restrict various income-splitting opportunities; however, multiple opportunities exist for income splitting and reducing the family’s overall tax burden.

1. Let the lower-income partner invest; the higher-income partner pays household bills. Suppose one partner earns income at a lower marginal tax rate. In that case, it will be tax-efficient for the other income partner to pay for family expenses, allowing the lower-income partners to build their savings and invest in their name. Any income generated by the lower-income partner will be treated as their income, which will not be attributed back to the higher-income partner and will be subject to a lower tax rate.
2. Contribute to your spouse’s TFAS. You can gift or contribute money to your spouse for their TFSA account. Any income, whether interest, dividend or capital gain, will not be subject to income tax or attribution rules. That is a very efficient strategy to generate tax-free income for the family for retirement planning and other family goals while avoiding attribution rules.
3. Contribute to a Spousal RRSP: If you contribute to your spouse’s RRSP, it is called a “spousal RRSP.” Like a TFSA, the income generated within the RRSP is not attributed back to you. However, if your spouse withdraws funds from the spousal RRSP within two years of your contribution, the amount withdrawn will be attributed back to you and included in your taxable income—not your spouse’s.
4. 2nd generation income: As we discussed before, if you gift or loan at a low rate or no interest, any income generated by your spouse will be attributed back to you and included in your tax return. However, when your spouse reinvests that income, any subsequent income earned on this reinvested profit will not be attributed back to you. However, one must carefully track the income (or maintain a separate account) for the original investment and profit generated. This way, your spouse can accumulate substantial profit and reinvest, avoiding attribution rules.
5. Loan money to the spouse at the prescribed rate (“the CRA’s prescribed rate”). In this strategy, you loan money to a spouse with a lower marginal tax rate to invest and charge your spouse interest at the CRA’s prescribed rate. The generated income will be considered your spouse’s income and not yours and taxed at a lower marginal rate. However, you must report the interest you charge to your spouse on your return. However, you need to take extra care when paying interest. Your spouse must pay the interest at the latest by January 30 of the following year each year. If you miss the deadline, the attribution rule will apply not just to this particular year but also to all subsequent years.
6. Transfer of capital losses from spouse to you. If you have taxable gain and your spouse has taxable capital losses that they cannot use themselves, or even if they can use it, you may still want to transfer it to yourself because you may be in the higher marginal tax bracket.  Simply transferring (gifting) securities from your spouse to you will not work because the superficial loss rules will prevent you from claiming the losses. However, there is a strategy to transfer these losses to you. Here is how it will work. Instead of transferring it to you, your spouse should sell it to you at FMV. It is essential that you pay the consideration. Holding the securities for the next 30 days will trigger the superficial loss rule, disallowing your spouse to claim capital losses. These losses will now add the adjusted cost-based (ACB) of the securities, which you know. This way, you can effectively transfer the capital losses from your spouse to you.

Example: Transferring Capital Losses from Spouse

Let’s say:

• You (Alex) are in a higher tax bracket and recently sold some stocks, resulting in a $10,000 capital gain.
• Your spouse (Taylor) owns shares with a $10,000 capital loss and has no capital gains this year against which to use the loss.

What won’t work:

If Taylor simply gifts or transfers the shares to you, the superficial loss rules will kick in, and neither of you won’t use the loss.

What can work:

Here’s a better strategy:

1. Taylor sells the shares to you at fair market value (FMV), say for $5,000, and you actually pay this amount.
2. You now own the shares, and Taylor cannot claim the loss because of the superficial loss rule (since you’re an “affiliated person” and still hold the shares).
3. But here’s the trick: the $10,000 capital loss is added to your Adjusted Cost Base (ACB) of the shares.
4. Later, when you sell the shares, your ACB is higher, so you can realize a capital loss, which offsets your capital gain.

This increased cost base allows Alex to claim a larger capital loss later when he sells the shares, essentially transferring the loss from Taylor to Alex.

Key Point: Taylor must be denied the capital loss (due to the superficial loss rule), and Alex must hold the shares for 30+ days for the loss to be added to his ACB.

• Transfer future growth of a security or assets to your spouse. If you own assets or security that you anticipate may grow substantially in value, it is time to plan the transfer (sell) of assets from your name to your spouse in the lower income bracket. You must transfer it to your spouse, but ensure they pay the FMV.
• Buy a non-income-producing asset from your spouse: If your spouse owns any non-income-producing assets, such as a car, expensive artwork, or family cottage, which produce no income. The best bet is that you make them sell it to you, and you pay them the FMV. Your spouse might report a capital gain on the disposal of this asset. However, this will free up funds (transferred from you) for investment and future income generated by these funds will be taxed in the hands of your spouse, who is in the lower marginal tax bracket.
• Share CPP/QPP: Consider sharing your CPP/QPP pension with your spouse if they are in a lower income bracket. Certain conditions must be met, of course, such as you both must be 60 years or older, and you can share the pension for the period you lived together. You can combine both persons and divide it 50% between you and your spouse.
• Help your spouse finance a business by gifting or loaning funds to support their business. As long as the spouse is earning active business income, attribution rules do not apply, and the income will be taxed in their hands. High-net-worth families and corporate owners commonly use this strategy to reduce their overall tax burden.
• Pay your spouse a salary to split income. If you own a business, you may hire your spouse as an employee and pay them a salary. However, the salary must be reasonable for the work performed and consistent with what you would pay an unrelated person in the same role. If the amount is excessive or unsupported by actual duties, CRA may deny the deduction or reclassify it.
• Pay dividends to a spouse through your corporation (subject to TOSI rules). If your spouse is a shareholder in your corporation, you may be able to pay them dividends. However, the Tax on Split Income (TOSI) rules apply and may tax those dividends at the highest marginal rate unless an exception applies. To avoid TOSI, consider the following:
• The spouse must be actively engaged in the business on a regular, continuous, and substantial basis during the current or any five previous years or
• b. The corporation must not be a professional corporation or a service-based business, and the spouse must be 25 years or older and hold at least 10% of the votes and value of the corporation’s shares directly (not through a trust or another corporation).

To summarize, income splitting with a spouse remains possible under certain conditions, but it’s a highly technical area. Over time, the government has introduced several rules, including attribution and TOSI, to limit abusive income-splitting, especially among related individuals. Still, as we’ve seen in this part, legitimate strategies can be used effectively, particularly by high-net-worth families and business owners. These strategies must be carefully structured and documented, and seeking professional tax advice is strongly recommended before implementing them.

To recap, in Part 1, we covered the foundations of attribution and TOSI rules. In Part 3, we’ll explore how to split income with children and other family members while staying compliant—another area where planning opportunities exist, but so do potential pitfalls.

Click below to continue reading our next blog on the topic:

Part 3 – Income Splitting with Children While Staying Compliant with the Attribution Rules

Contact us today to learn how we can help you and your family reduce tax burden while staying compliant with the tax laws. We serve clients from all parts of GTA (Toronto, Mississauga, Brampton, Oakville, Milton, etc.) and Ontario. Book a call by calling at 647-930-8130.

Additional Sources: CRA Websites:

1. Frequently asked questions – Income sprinkling
2. Guidance on the application of the split income rules for adults

Tax Planning Experts for High-Net-Worth Families and Medical Professionals in Mississauga and the GTA — Source Accounting Professional Corporation is a trusted CPA firm in Mississauga, serving high-net-worth families, professionals, and business owners across the GTA—including Toronto, Brampton, Oakville, Milton, and Etobicoke. We offer specialized tax planning for doctors, dentists, nurses, pharmacists, consultants, and realtors, helping you reduce taxes through income splitting strategies and wealth transfer planning. 📞 Call 647-930-8130 to schedule a consultation with an experienced tax advisor.

Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.