Income Splitting

AAA

DEFINITION of 'Income Splitting'

A tax reduction strategy employed by families living in areas that are subject to bracketed tax regulations. The goal of using an income-splitting strategy is to reduce the family's gross tax level, at the expense of some family members paying higher taxes than they otherwise would.

INVESTOPEDIA EXPLAINS 'Income Splitting'

An example of income splitting is a higher income family member transferring a portion of his or her income to a lower income family member through some legal means, such as hiring the lower income family member and deducting the cost of the labor as a legitimate business expense. Although the family still earns the same amount of money, the overall amount of tax it must pay is reduced.

Another example is the transfer of tax credits from a lower income family member to a higher income family member. This can be done by transferring tuition credits from students to parents funding their children's post-secondary educations.

In Canada, an income-splitting technique can be used to reduce tax liability through RRSP contributions because money contributed to RRSPs is tax deductible. A higher income family member can contribute to a lower income family member's RRSP, thus lowering the higher income person's overall tax liability and potentially moving the higher income family member into a lower tax bracket.

RELATED TERMS
  1. Tax Shelter

    A legal method of minimizing or decreasing an investor's taxable ...
  2. Regressive Tax

    A tax that takes a larger percentage from low-income people than ...
  3. Tax Credit

    An amount of money that a taxpayer is able to subtract from the ...
  4. Tax Bracket

    The rate at which an individual is taxed. Tax brackets are set ...
  5. Tax Shield

    A reduction in taxable income for an individual or corporation ...
  6. Registered Retirement Savings Plan ...

    A legal trust registered with the Canada Revenue Agency and used ...
Related Articles
  1. Retirement

    Tax Breaks For Canadian Families

    Canadians have a lot of advantages when it comes to family tax perks.
  2. Personal Finance

    Pros And Cons Of Offshore Investing

    Tax loopholes are shrinking, but there are still plenty of viable prospects. Get the big picture.
  3. Taxes

    Registered Retirement Savings Plans (RRSP)

    Learn how the Canadian government makes saving for your post-work years easy. We take you from your first contribution to your first withdrawal.
  4. Retirement

    How does the Canada Pension Plan (CPP) work, and what asset mix does it hold?

    Learn the difference between a chartered financial analyst and the Canadian pension plan. Explore Canadian retirement options and how the CPP is invested.
  5. Professionals

    Why Retirement Advice Is Better But Still Lacking

    With a multitude of resources available to savers and their advisers, you'd think that retirement planning would be a breeze. Here's why you'd be wrong.
  6. Professionals

    Who Needs A Financial Advisor? These Professionals

    A thief once said he preferred banks because "that's where the money is." Similarly, financial advisors focus on these professions for news clients.
  7. Professionals

    Tips For Managing A Cash Windfall

    Many of us fantasize about winning a big lottery jackpot. Let’s say that actually happened? What would you do with the money? How would you manage it?
  8. Professionals

    Ways To Cut 401(k) Expenses

    You might need to be vigilant and a bit creative to lower overall 401(k) expenses, but the payoff can be big. Here's a quick guide.
  9. Investing Basics

    8 Essential Tips For Retirement Saving

    Whether you're a saver or a financial advisor who want to give their clients a leg up, these 8 tips are essential for financial planning.
  10. Investing Basics

    'Donut Hole' Essentials For The Financial Advisor

    The Medicare Part D donut hole can confound the best of us. Here's what financial advisors and their clients should know.

You May Also Like

Hot Definitions
  1. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  2. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  3. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  4. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  5. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  6. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
Trading Center