Income splitting and the attribution rules

Each person in Canada is taxed separately, at rates that rise with income. So when one partner earns much more than the other, a household can pay less tax overall if some income is taxed in the lower earner’s hands instead. That’s income splitting. The Income Tax Act allows some ways of doing it and blocks others through the attribution rules, which send the tax on certain income back to the person who supplied the money.

Giving or lending to your spouse or partner

If you give or lend money or other property to your spouse or common-law partner, you may have to report the income it earns, such as interest and dividends, on your own return instead of theirs. The rule follows the money: it also covers income from any replacement property, such as an investment they buy with what you gave them. It applies to someone who has since become your spouse or partner, and to loans or transfers to a trust for them.

Capital gains come back to you too. You generally don’t have a capital gain or loss when you give capital property, such as shares, to your spouse or partner: you’re considered to have sold it for its tax cost (its adjusted cost base, or its undepreciated capital cost if it’s depreciable property), and they’re considered to have bought it for that same amount. But if they sell it during your lifetime, you usually have to report the capital gain or loss if, at the time of the sale, you’re a resident of Canada and still married to them or living common-law with them.

Giving or lending to children under 18

If you give or lend property to a related minor, such as your child, grandchild, brother or sister, or to a niece or nephew, you may have to report the income it earns (interest and dividends, for example) for any year in which they’re under 18 at the end of the year. This stops for the year they turn 18.

The capital gains rule above covers only your spouse or partner (and trusts for them), not children. So if a child sells property you gave them at a gain, the gain generally isn’t taxed back to you.

When the rules stop applying

• Separation. Income from property you gave or lent your spouse or partner isn’t taxed back to you for the time you live apart because your relationship broke down. Capital gains can stop coming back to you too, but only if the two of you elect: the CRA says to attach to your return a letter signed by both of you saying you don’t want the rule to apply. You can file it with your return for the year you separated or any later year, but no later than your return for the year they sell the property.
• Divorce or leaving Canada. Income isn’t taxed back to you for any period when you aren’t a resident of Canada, or when the person is no longer your spouse or partner (after a divorce, for example). The capital gains rule applies only to sales during your lifetime, while you’re a resident of Canada and still together.

Loans at the prescribed rate

You can lend money to your spouse or partner, or to a child under 18, without the income and gains being taxed back to you, as long as:

• you charge interest at a rate no lower than the lesser of the prescribed rate in effect when you made the loan and the rate that people dealing at arm’s length would have agreed on at that time, and
• the interest for each year is paid no later than 30 days after the end of that year, which is January 30 of the next year.

If the interest for any year is paid late, the exception is lost for that year and every year after. The rate that counts is the prescribed rate in effect when you made the loan, so the loan still qualifies when the rate goes up in later quarters.

Under the Income Tax Regulations, the prescribed rate for these loans is the basic quarterly rate, not the higher rates the CRA charges on overdue tax or pays individuals on refunds. It’s the same rate the CRA publishes each quarter as the rate for working out taxable benefits from interest-free and low-interest loans. For loans made from October 1 to December 31, 2026, it’s 3%.

Selling an investment to your spouse or partner can work in a similar way. If they pay you at least its fair market value (any part paid with a loan from you has to meet the interest rules above), and you elect on your return for the year of the sale to report it at fair market value, later income and capital gains on it are theirs. You report any capital gain on the sale for that year. To make the election, the CRA says to attach to your return a letter signed by both of you stating that you’re reporting the sale at fair market value.

Adult children and other relatives

The rule for minors stops for the year a child turns 18, so income on money you give an adult child isn’t taxed back to you under that rule.

A separate rule covers loans. If you lend money to an adult child or another relative and one of the main reasons for the loan is to reduce or avoid tax by having the income from the money (or from what it buys) taxed to them, that income is taxed as yours. The same kind of exception applies: charge interest at no less than the lesser of the prescribed rate in effect when you made the loan and an arm’s-length rate, and have each year’s interest paid by January 30 of the following year.

Ways to split income the rules allow

• Spousal RRSP. The attribution rules don’t apply to contributions you make to your spouse’s or partner’s RRSP, to the extent you can deduct them. A separate rule applies to withdrawals: if you contributed to any of their RRSPs in the year they withdraw or either of the two years before, the CRA says you’ll probably have to include all or part of the withdrawal in your income. See spousal RRSPs.
• TFSA. You can give your spouse or partner money to contribute to their own TFSA. The CRA says neither the gift nor the income earned on it will be allocated back to you, though their contributions still can’t go over their own contribution room. The Income Tax Act gives the same treatment to money they put in their own first home savings account (FHSA), while it stays in the account and as long as they don’t have an excess FHSA amount when they contribute it.
• RDSP. Under the Income Tax Act, contributions to a registered disability savings plan are also exempt from the attribution rules. See the RDSP.
• Pension income splitting. At tax time, you and your spouse or partner can jointly elect to move up to 50% of one partner’s eligible pension income to the other’s return, if you meet the conditions. See pension income splitting.
• CPP pension sharing. If you live together and either of you receives, or has applied for, a CPP retirement pension, you can apply to Service Canada to share your pensions. The share is based on the number of months you lived together during the period when either of you could have contributed. It starts once approved and can’t be backdated. Service Canada notes that sharing may result in tax savings, and that it isn’t the same as the CRA’s pension income splitting.

Family businesses and corporations

Paying dividends or other income from a private corporation or family business to relatives raises a different set of rules, the tax on split income (TOSI), which can tax that income at the highest rate. See paying family members and TOSI.

What to do

1. Before moving investments into a spouse’s or child’s name, work out whose return the income and gains will land on.
2. For a family loan, charge at least the prescribed rate in effect when you lend, and make sure the interest is paid by January 30 every year. Keep records of the loan and each interest payment.
3. Use the TFSA room each of you has, and consider a spousal RRSP.
4. In retirement, compare pension income splitting and CPP sharing. You can run each partner’s income through our income tax calculator to compare.