Income Splitting

As a physician, you are subject to higher tax rates, which can make it difficult to maximize your wealth and reach your long-term financial goals. One of the many reasons why physicians may choose to incorporate is to benefit from tax savings. This can be done by tax deferral and income splitting.  Income splitting is where you pay a family member for work they do on behalf of your company. This will lower the total tax bill for the family unit. 

For those that do not own their own practice, there are other methods that allow couples to benefit from income splitting. Consider the following:

Use of a Family Trust

A family trust is an entity that you control and allows you to pay investment income to family members at lower tax rates as the beneficiaries of the trust. The process is simple in concept, you take after-tax cash (equity in your home, etc) and lend it to your family trust.  The trust then invests the funds to generate recurring income. The trust will pay you interest at CRA’s prescribed rate which is currently 1%.The excess is then paid to the beneficiaries and taxed at their individual tax rates. This can be used to generate additional cash flow for your family or reduce the salary you pay yourself from your MPC now that some expenses are covered by the investment proceeds of the trust. There are specific tax rules to consider when contemplating if a family trust will fit with your financial plan.

Spousal Registered Retirement Savings Plan

A spousal registered retirement savings plan (RRSP) is an easy option to help reduce net income for tax purposes. If one spouse or partner will earn a significantly higher retirement income than the other, the higher income individual is able to use some of their own contribution room to add to the other’s RRSP. When the lower income individual withdraws the money in retirement, they will pay tax at their individual rate. 

Spousal Loan

Intended for investment purposes, the higher income individual is able to loan money to the lower income individual. There must be a formal loan agreement and your spouse must pay interest on the loan at CRA’s prescribed rate which is currently 1%.The goal is to invest this money and earn a higher return than the prescribed rate which will be taxed at your spouses individual rate. Additionally, interest on loans given for investment purposes can be tax deductible.

Tax Free Savings Accounts

Tax Free Savings Accounts are another relatively easy way to split income. TFSAs allow tax free gains on investments, as well as the ability to withdraw the funds tax free, at any time. In the event that the lower income individual still has contribution room in their account, the higher income individual is able to give the lower income individual money to contribute.

At, our primary goal is to help limit medical professional tax liabilities. To learn more about income splitting and the options available to a physician, contact one of our tax experts here today!

About the Author: Alex Powell

CPA CA, Director

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