DEFINITION of 'Income Spreading'

A tax reduction strategy that is typically used by people with highly volatile incomes to reduce the overall marginal tax rate paid on a large sum of income. This strategy involves particularly large sources of income and dividing the amount realized over a period of years in order to reduce the overall amount of taxes paid.

BREAKING DOWN 'Income Spreading'

Professional sport stars and actors in the entertainment industry are examples of people who may want to employ some sort of income-spreading strategy in order to smooth out the volatility of their income streams.

Another use of non-retirement related income spreading in Canada is to place a portion of income into an RRSP and then withdraw the amount when the person decides to return for more schooling. Because RRSPs do not penalize people for withdrawing funds early if they are used for educational purposes, a person would effectively be paying less tax on the sum because, as a student, the person's marginal tax rate would be lower.

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