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 FAQS
  1. How should I invest the money I keep on my IRA?

    For individuals who are just starting to save, certificates of deposit can be a good place to start, but the interest rates ... Read Full Answer >>
  2. Why choosing the right investment advisor is crucial for your portfolio's health

    Just as finding a good mechanic will help keep your car running smoothly, finding a good broker or financial advisor can ... Read Full Answer >>
  3. What documents I need to transfer an IRA/SEP/SIMPLE to a Traditional IRA?

    Most firms require that you complete their account transfer request form, which they use to request the transfer of assets ... Read Full Answer >>
  4. Is there a limit on how much I can move from my IRA to my Roth IRA?

    There is no limit on the amount that can be converted from your Traditional IRA to your Roth IRA. To learn more, read Retirement ... Read Full Answer >>
  5. How does the Canada Pension Plan (CPP) work, and what asset mix does it hold?

    The Canada Pension Plan (CPP) is a compulsory, contributory, earnings-related social insurance program. Since 1966 the CPP ... Read Full Answer >>
  6. What's the difference between a financial advisor and a financial planner?

    A financial advisor can be a financial planner. However, the term is not limited to financial planning in and of itself. ... Read Full Answer >>
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. Professionals

    Finding a Top Financial Advisor in Canada

    Choosing a financial advisor is a difficult and important job. A ranking of Canadian advisors can help you make the right decision.
  5. Fundamental Analysis

    Should You Hire an Advisor or DIY Your Savings?

    Investors should consider index funds and robo-advisors before committing to a costly professional money manager.
  6. Personal Finance

    Financial Planning: Can You Do it Yourself?

    There's no shortage of financial advice out there, but do you have the inclination, time and skills to do it yourself?
  7. Personal Finance

    Do Financial Analysts Need Financial Advisors?

    Financial analysts are very knowledgable about investments, but that doesn't mean they couldn't use advice on how to manage their own finances.
  8. Personal Finance

    When is Hiring a Financial Advisor Necessary?

    Do you have the time, skills and inclination to manage your own finances and plan for the future? If not, it might be wise to call in a professional.
  9. Entrepreneurship

    Why Small Business Owners Need Financial Advisors

    Small business owners are too busy to effectively manage their own money. That's why a financial advisor can be a big help.
  10. Personal Finance

    5 Signs You're Getting Bad Financial Advice

    Use good judgment and practice due diligence when contracting with professional money managers and advisors.

You May Also Like

Hot Definitions
  1. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  2. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  3. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  4. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  5. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  6. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!