Income Splitting Income splitting is one of the pillars of successful tax planning. Simply defined, it is the process of shifting income from the hands of one family member to another who will pay tax at a lower rate. Simply put, the rules attribute certain income earned by family members back to the taxpayer who initially transferred the assets to the family member. Dr. X. No change in taxes payable by the family unit should be the result. Although income attribution rules have reduced the opportunity to income split, there still exist a number of permissible and creative ways to redistribute income within a family and reduce the overall tax burden for the family unit.
Many physicians expect their spouses to be in a lower tax bracket than themselves upon retirement.
A spousal RRSP is therefore beneficial since the funds generated upon retirement will be taxed in the spouse's hands, at the lower tax rate. Furthermore, the physician receives the initial tax deduction at the higher marginal tax rate. Not only will the total tax burden to the family unit be reduced, but also the future use of the pension tax credit may be extended to both spouses. In some situations, the Canada Pension Plan Act allows the assignment of a portion of a taxpayer's retirement pension to his or her spouse. In many cases, legislation will allow spouses to equalize their eventual CPP benefits.