Have you heard of income splitting? Income splitting is a tax-planning strategy that can help shift income around to help avoid paying a high marginal tax rate. Our team at Wales Accounting are experts in Tax Services in Richmond Hill and we look forward to sharing with you a little more insight into what income splitting is and who is eligible to take advantage of it. 

Income Splitting 

In more detail, income splitting refers to how two people can work together to distribute their income to help with tax saving. Income that can be split includes income from property, business, or other sources. The main benefit of income splitting is that it can bring a household’s income into a lower total tax bracket which results in paying less in taxes. Essentially, as a person’s income increases, so does the tax they have to pay. But income splitting allows one to pay a lower amount in taxes as one is splitting the income and putting themselves into a lower tax bracket. 

Federal Tax Brackets 

To further understand how taxes work and to see how one can benefit from income splitting, let us explain how the tax brackets in Canada work at the federal level. There are five accepted tax brackets, which include: 15%, 20.5%, 26%, 29%, and 33%. For the 15%, this includes any income that is at or below $45,282. Even if you make a dollar more than this figure, you will be pushed up into the next tax bracket. 

Keep in mind that if you make $45,500 per year, the first $45,282 will be taxed at 15%, while only the difference of $218 will be taxed at 20.5%. 

Save Money with Income Splitting 

In terms of how the federal tax brackets work, we will now explain how income splitting can be applied to help you save money. Since income splitting allows one to split their income between two people, if one has a high amount of income they would be subject to a higher amount of tax, but if they split their income with someone else, they now each have a lower amount of income and therefore can be subject to a lower tax bracket. Which will help save money. 

Who is Eligible for Income Splitting  

Many people are eligible to take advantage of income tax savings through income splitting. One common form of income splitting is through spouses who are either both shareholders or partners of a corporation. They can split this form of income amongst themselves. Another form of income splitting can be done through pension income. While certain parameters exist for pension income splitting, eligible pension income includes part-of-life annuity payments or pension funds from employers. 

How We Can Help 

Before you attempt income splitting, it’s best to speak to a professional to see if you are eligible to do so. Our team at Wales Accounting can give you quality advice and help walk you through the process if you are interested and eligible. To see how our Income Tax Filing in Richmond Hill services can help you, contact us at (905) 508-9262 today.