Unlock Tax Savings: 5 Smart Ways to Share Income with Your Family in Canada

In Canada, the taxman generally likes everyone to pay taxes on their own income. The idea of "income splitting" – shifting income from a higher-earning family member to a lower-earning one to reduce the overall family tax bill – is heavily restricted. These rules are often called the "Tax on Split Income," or TOSI.

However, the rules aren't airtight. With careful and strategic planning, there are still several effective ways to legally share income within your family and keep more money in your pockets. 💰

Here are five key opportunities for income splitting that you should know about.

1. Multiply the Lifetime Capital Gains Exemption (LCGE)

One of the most powerful tax breaks in Canada is the Lifetime Capital Gains Exemption (LCGE). It allows you to sell shares of a qualifying small business corporation (QSBC) and pay zero tax on a significant portion of the profit. For 2025, this exemption is over $1 million!

The best part? Every individual in your family has their own LCGE.

How it works for income splitting:

Instead of one person owning all the shares of a family business, you can set up a family trust to hold the shares. When the business is sold, the capital gain can be distributed among the family members who are beneficiaries of the trust (like your spouse and children). Each person can then use their own LCGE to shelter their portion of the gain from tax. This can result in massive tax savings.

A key thing to watch out for:

 Be careful when selling shares on behalf of minors. There are specific rules that could turn that tax-free capital gain into a taxable dividend, so professional advice is crucial here.

2. Use Prescribed Rate Loans

This is a classic and effective income-splitting strategy. It involves a higher-income family member loaning money to a lower-income family member (or a family trust set up for them).

How it works:

1. You lend a sum of money to your spouse or a family trust for your children.

2. The loan must charge interest at the government's "prescribed rate" at the time the loan is made. This rate is set by the CRA every quarter.

3. The trust or family member invests the borrowed money (for example, in publicly traded stocks or mutual funds).

4. The investment income is taxed in the hands of the lower-income family member, who is in a much lower tax bracket.

Crucial Rules: 

For this to work, the interest on the loan must be paid every single year no later than 30 days after the end of the year. If you miss a payment, the strategy is broken, and all the investment income will be taxed back in your hands at your higher rate.

3. Dividend Sprinkling for a Spouse Over 65

The government has relaxed the income-splitting rules for business owners whose spouses are 65 or older.

How it works:

If you own a corporation, you can issue a different class of shares to your spouse. This allows you to pay them dividends, even if they aren't actively involved in the business. As long as the income from the business wouldn't have been subject to the TOSI rules for you, you can effectively "sprinkle" dividends to your spouse. This is a fantastic tool for retirement planning.

4. Pay Dividends to an Actively Engaged Adult Child

If your adult children are genuinely involved in the family business, you can make them shareholders and pay them dividends. This is not considered income splitting under the TOSI rules because they are earning a return based on their contribution.

What does "actively engaged" mean?

The government defines this as working in the business on a "regular, continuous and substantial basis." While every case is different, a common benchmark is that the individual works an average of at least 20 hours per week during the time the business operates throughout the year. If your child meets this threshold, you can pay them dividends as a shareholder, which can be a very tax-efficient way to compensate them.

5. The "Excluded Shares" Exception for Shareholders Over 25

This is another important exception to the TOSI rules, aimed at family members who have a significant stake in a family-run business.

How it works:

An adult family member (age 25 or older) can receive dividends without triggering the TOSI rules if they own "excluded shares." To qualify, several conditions must be met, including:

• The business is not a service business: Less than 90% of the company's income comes from providing services.

• It's not a professional corporation: This exception doesn't apply to corporations for professionals like doctors, dentists, lawyers, or accountants.

• They have a real stake: The shareholder must own at least 10% of the votes and value of the corporation.

• The business is independent: The company isn't primarily earning its income by providing services to another related family business.

If these conditions are met, you can pay dividends to that family member, and they will be taxed at their own, likely lower, marginal tax rate.

Final Thoughts

Navigating Canada's tax rules on income splitting can feel like walking through a maze. But as you can see, with the right knowledge and planning, there are clear paths to significant tax savings for your family. The key is to be proactive. To explore which of these strategies might work for your specific situation and to ensure you're following all the rules, consult with us at Modern Axis CPA.

Disclaimer: This blog post is for informational purposes only and does not constitute legal or financial advice. Please consult with your own professional advisors to see what strategies are right for your specific situation.