Income splitting still works in Canada, but only through the routes the tax rules allow: splitting eligible pension income, spousal RRSPs, prescribed-rate loans, paying family members a reasonable salary for real work, and private-company dividends that fall outside the tax on split income (TOSI). Outside those routes, the attribution rules or TOSI generally tax the income back to the higher earner, or at the top rate.
The payoff comes from Canada’s progressive rates. In 2026 the federal rate is 14% on the first $58,523 of taxable income and 33% above $258,482, and Ontario adds its own brackets. This guide covers each strategy, the current numbers, and the TOSI limits that matter for Ottawa business owners who pay dividends to family.
Table of Contents
- How income splitting works, and why the rules are strict
- Pension income splitting
- Spousal RRSPs
- Prescribed-rate loans
- Paying family members a reasonable salary
- TOSI: the limits on dividends to family members
- How BBA Tax helps
- Frequently Asked Questions
Key Takeaways
- Up to 50% of eligible pension income can be split with a spouse or common-law partner on Form T1032. CPP and OAS payments do not qualify.
- A spousal RRSP gives the contributor the deduction, but a withdrawal is taxed back to the contributor if they contributed that year or in either of the two years before.
- A loan to a spouse avoids the attribution rules if it charges at least the CRA prescribed rate (3% for loans made from October 1 to December 31, 2026) and the interest is paid by January 30 each year.
- A salary to a spouse or child must be for real work, reasonable for that work, and reported on a T4.
- Private-company dividends to family members are taxed at the top rate under TOSI unless an exclusion applies, such as working in the business an average of 20 hours a week.
How income splitting works, and why the rules are strict
Income splitting shifts taxable income from a family member in a high bracket to one in a lower bracket, so the family pays less tax overall. The Income Tax Act blocks the simple versions.
Under the attribution rules, if you give or lend money or other property to your spouse or common-law partner, or to a related child under 18, the income from that property is generally taxed in your hands, not theirs. Capital gains on property you give your spouse are usually attributed back to you as well. Since 2018, TOSI has applied to certain income adult family members receive from a family business, such as private-company dividends, unless an exclusion applies.
One small exception is worth knowing: if you deposit Canada child benefit payments into an account in your child’s name, the interest on those payments is the child’s income, not yours.
Here is how the main strategies compare for 2026:
| Strategy | Who it suits | Key rule for 2026 |
|---|---|---|
| Pension income splitting | Couples where one spouse receives eligible pension income | Up to 50% of eligible pension income, elected on Form T1032 |
| Spousal RRSP | Couples with uneven incomes saving for retirement | Contributor deducts; withdrawals are taxed to the contributor if they contributed that year or in the two years before |
| Prescribed-rate loan | A higher earner with savings to invest in a lower-income spouse’s name | Interest of at least 3% (loans made October 1 to December 31, 2026), paid by January 30 each year |
| Salary to family members | Business owners whose spouse or children work in the business | Real work, reasonable pay, payroll deductions and a T4 |
| Dividends to family members | Incorporated owners with family shareholders | Taxed at the top rate under TOSI unless an exclusion applies |
Pension income splitting
If you receive eligible pension income, you can allocate up to 50% of it to your spouse or common-law partner each year. You both sign Form T1032, Joint Election to Split Pension Income, and file it with your returns by the filing deadline. You deduct the split amount on line 21000, and your spouse reports it as income.
What counts depends on age. Life annuity payments from a registered pension plan qualify at any age. RRIF and life income fund payments, and RRSP annuity payments, generally qualify only once the transferring spouse is 65 or older at the end of the year, or if they are received because of a spouse’s death. The CRA is clear that Old Age Security and CPP or QPP payments are not eligible.
You must both be resident in Canada on December 31, and not living apart because of a breakdown in the relationship for 90 days or more that include December 31. The best split can change every year, so recalculate it each spring rather than repeating last year’s percentage.
Spousal RRSPs
A spousal RRSP lets the higher earner contribute to an RRSP in their partner’s name. The contribution uses the contributor’s own RRSP room (the 2026 dollar limit is $33,810) and the contributor claims the deduction, but the money belongs to the spouse and is taxed in their hands when it comes out.
There is a timing catch. If the contributor paid into any spousal RRSP in the year of a withdrawal, or in either of the two years before, the withdrawal is generally taxed to the contributor instead. Form T2205 works out how much. You can keep contributing to a spousal RRSP until the end of the year your spouse turns 71.
For how a spousal RRSP fits with your other savings, see our guide to RRSP vs TFSA.
Prescribed-rate loans
A prescribed-rate loan lets a higher-income spouse lend money to a lower-income spouse, who invests it and is taxed on the investment income. It only works if the loan charges interest of at least the CRA prescribed rate in effect when the loan is made (or an arm’s-length rate, if lower), and the interest for each year is paid no later than 30 days after the year ends.
For loans made from October 1 to December 31, 2026, the prescribed rate is 3%. The rate is reset every quarter, but the test uses the rate in effect when the loan was made. The rate for January to March 2027 had not been announced in early October.
- Pay the interest by January 30, every year. If one payment is late, the attribution rules apply for that year and every later year of the loan.
- Both spouses report it. The lender reports the interest received as income. The borrower can usually deduct the interest paid as a carrying charge, because the money was borrowed to earn interest or dividends (not if the investment can only produce capital gains).
- Keep a clear paper trail. Put the loan in writing and pay the interest from the borrowing spouse’s own account.
Paying family members a reasonable salary
If your spouse or children work in your business, paying them a salary moves income to them and gives the business a deduction. For sole proprietors, the CRA’s conditions are that you actually pay the salary, the work is necessary to earn business income, and the amount is reasonable for the person’s age and what you would pay someone else for the same work.
Keep proof of payment, such as cancelled cheques or signed receipts for cash, and report the wages on T4 slips like any other employee. You cannot deduct the value of room and board you provide to a dependent child or your spouse.
Corporations face the same test in a different form: the Income Tax Act only allows a deduction for an expense to the extent it is reasonable in the circumstances. A salary is employment income, so you need a payroll account and source deductions; our guide to setting up small business payroll covers the steps.
Paying family members from your corporation? BBA Tax can check whether TOSI applies before you declare dividends, and set up family salaries through payroll correctly. Book a free intro call.
TOSI: the limits on dividends to family members
TOSI taxes certain income from a family business at the top rate, whatever the recipient’s other income. It applies to split income such as dividends on shares of private corporations, shareholder benefits, income from partnerships or trusts that comes from a related business, and certain capital gains.
On the current Form T1206 (2025), federal TOSI is 33% of split income and the Ontario rate is 20.53%, which is Ontario’s top rate including surtax. Only the dividend tax credit, the disability tax credit and the foreign tax credit can reduce it.
Whether a family member’s income is caught depends mostly on their age and involvement. These are the main exclusions, which are taxed at normal rates instead:
| TOSI exclusion | Age | Main test |
|---|---|---|
| Excluded business | 18 or older | Actively engaged in the business on a regular, continuous and substantial basis in the year or in any five earlier years; working an average of 20 hours a week while the business operates counts |
| Excluded shares | 25 or older | Owns shares with 10% or more of the votes and value; less than 90% of the corporation’s business income is from services; not a professional corporation; income not from another related business |
| Reasonable return | 25 or older | The amount is reasonable given the person’s work, property contributed, risks taken and past payments |
| Return on own capital | 18 to 24 | Limited to a safe harbour capital return, or a reasonable return on capital that was not borrowed, not transferred from a relative and not earned from the business |
| Spouse of an owner 65 or older | Any | Amounts that would be excluded for the owner, if the owner is 65 or older by the end of the year |
Children under 18 have very few exclusions, so private-company dividends to a minor child are generally taxed at the top rate. Each exclusion also has conditions not shown here, so test every family member every year. Adding a family trust or a holding company does not avoid TOSI on income that comes from a related business. For how dividends are taxed when TOSI does not apply, see our guide to dividend tax in Canada.
How BBA Tax helps
BBA Tax works with incorporated business owners and families in Ottawa and across Canada on these decisions: whether a family member’s dividends clear TOSI, how much salary is reasonable, and how to document a prescribed-rate loan. Our tax planning for incorporated business owners covers the corporate side, and our payroll services handle family salaries, source deductions and T4s.
For couples, we prepare both personal tax returns together, including the pension-splitting election on Form T1032.
Frequently Asked Questions
Can I split CPP or OAS with my spouse?
Not through pension income splitting. The CRA lists Old Age Security and CPP or QPP payments as amounts that are not eligible pension income, so they cannot be included on Form T1032. Eligible pension income includes life annuity payments from a registered pension plan and, once the transferring spouse is 65, RRIF and RRSP annuity payments.
What is the prescribed rate for a spousal loan right now?
The CRA prescribed rate is 3% for loans made between October 1 and December 31, 2026. A loan has to charge at least the rate in effect when it was made, and the interest for each year must be paid no later than 30 days after year-end. The rate for early 2027 had not been announced as of early October 2026.
Does TOSI apply to salaries paid to family members?
No. TOSI applies to split income such as private-company dividends, shareholder benefits and certain trust, partnership and capital gains amounts, not to employment income. A salary is tested differently: it has to be for real work and reasonable for that work, or the business can lose part of the deduction.
At what age can my children receive dividends without TOSI?
It depends on the exclusion. From 18, dividends can be excluded if the child is actively engaged in the business, for example by working an average of 20 hours a week. From 25, more exclusions open up, including excluded shares and a reasonable return. Under 18, private-company dividends are generally caught.
Can a retired business owner split dividends with a spouse?
Often, yes. If the business owner is 65 or older by the end of the year, amounts paid to their spouse are excluded from TOSI when they would have been excluded for the owner. That can let a retired owner pay dividends to both spouses at normal rates, as long as the owner’s own amounts qualify.
