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Engineering Optimal Tax Rates

2021-10-18, Jason Reed

In Canada, taxes are calculated using a progressive approach in which tax rates increase as income rises. While this progressive tax system has its advantages, it is worth noting that families are not taxed based on their combined household income. Rather, every person is taxed individually on income attributed to them. A family may have fairly modest total household earnings, but vastly different individual marginal tax rates depending on their career choices and stage of life. Fortunately, for situations like this, Canada’s tax laws allow families to shift income from higher to lower earners in a family, resulting in more even distribution of income and lower overall taxes paid by the household.

Below we describe some of the easiest and most common ways for families to re-distribute income, primarily between spouses, as a way to lower their overall tax bill.


If a household has funds available to invest in a non-registered account, it may make sense to have the lower income earner invest as much as possible in this account. Returns would then be taxed at a lower marginal tax rate, meaning after-tax returns would be greater, all else equal. One way to achieve this is to rethink how expenses are distributed within a household. For example, expenses such as groceries, utility bills, travel, childcare, mortgage and tax bills should not be split equally, but rather such that the lower income earner has the opportunity to invest most or all of their after-tax income. The most explicit way to manage this strategy is through separate bank accounts, although this could come with higher account fees. However, you can also utilize this strategy with a joint bank account, simply by limiting the annual investment amount to the lower earner’s after-tax income.

What we like about this strategy is that it’s easy to implement and there are no additional reporting requirements for your tax return. We recommend keeping a proper paper trail in the event you need to prove to the CRA (Canada Revenue Agency) how the lower income spouse accumulated funds to invest. If your household has funds available to invest in a non-registered account, we encourage you to speak to your QV Investment Counsellor to discuss whether this strategy may be beneficial.


The attribution rules in the Income Tax Act deem income from property (investments included) transferred or gifted to a family member is attributed back to the original transferor. Fortunately, these rules do not apply when money is gifted to your spouse to be invested in their TFSA.

Whether one spouse earns a lower income, or no income at all, the higher income earner can contribute to the lower income earner’s TFSA up to their maximum contribution limit. While there are no tax deductions, you increase your household’s overall tax-free income sheltering abilities.


Investing in an RRSP (personally or through a spousal RRSP) is a tax efficient way to save and invest by deferring the taxes you would otherwise pay on investment returns. Individual RRSPs, which are later converted to RRIFs (registered retirement income funds), are an efficient vehicle for income splitting during retirement, allowing up to 50% of income to be allocated to a spouse if the owner of the plan is at least 65 years of age. In some instances, this 50% allocation alone may not be sufficient to equalize a couple’s total taxable income if there is a significant difference in accumulated assets between spouses on retirement.

To provide further optionality for income splitting during retirement you can set up a spousal RRSP during your working years, wherein the higher earner contributes to the lower earner’s spousal RRSP, receiving the RRSP deduction at the higher marginal tax rate at the time the contribution is made. Assuming the tax rate differential remains similar during retirement, the withdrawals made by the annuitant of the RRSP (the lower earner), will be taxed at the lower marginal rate. This method gives couples the ability to split up to 100% of their RRSP retirement income.

Another reason to explore a spousal RRSP is if you and your spouse plan on retiring before the age of 65 and need to supplement your retirement paycheque with funds from an RRSP. Because you cannot split RRIF income before the of 65, it may make sense to begin withdrawing from the lower-income spouse’s spousal RRSP, taxed at the lower marginal tax rate.

Below is a summary on some of the differences between personal RRSP’s and spousal RRSP’s:


Direct gifting or transferring money from one spouse to another is likely to get caught up under the attribution rules and will likely be viewed by the CRA as an attempt to avoid taxes. To circumvent this complication, a higher earner can lend money to a lower-earning adult family member, or in a family trust (if minors are involved), at the prescribed interest rate in effect at the time the loan is originated. This rate is locked in for the life of the loan, no matter the subsequent changes to the CRA’s prescribed interest rate.

The interest on the loan needs to be paid (not just added onto the value of the note) within thirty days of the end of each calendar year (by January 30th) following the onset of the loan and is taxed as income in the hands of the lending partner. The borrower, on the other hand, is able to deduct 100% of the interest against their investment income.

This strategy is beneficial for those in significantly different tax brackets and where the higher income earner has funds available to invest in a personal non-registered investment account. Consider a scenario where one spouse has $150,000 to invest and is in the highest marginal rate (48%). If they lend this money to the spouse who is in the lowest marginal tax rate (25%), assuming a 5% rate of return, they could realize a first year’s tax savings of up to $1,380. When you combine the tax rate differential with the power of compounding, the benefit over time can be substantial. Assuming the same annual return of 5%, the tax savings after 10 years could amount to over $15,000.

The above example uses the July 2021 current prescribed interest rate of 1%, Alberta income tax rates and assumes income generated from investments is interest income only.

Click here for the most up to date prescribed interest rate.

Implementing this strategy is simple but you will need to speak to a qualified tax advisor to draft a legally enforceable loan and promissory note agreement. Please let us know if you would like us to introduce you to one of our trusted partners.

Please keep in mind that if you choose to increase the amount you loan to your spouse each year, a new loan must be established and documented.


For more information on income splitting and how it may apply to your individual circumstances, we encourage you to reach out to your QV Investment Counsellor. As a client of QV, you have access to our financial planning service in which we can assess your overall situation and identify opportunities based on your goals and objectives.

All views and projections are the expressed opinion of QV Investors Inc. and are subject to change without notice. This Update is provided for informational purposes only. QV Investors takes no legal responsibility from any losses resulting from investment decisions based on the content of this Update.


Jason Reed | Investment Counsellor

Jason builds relationships and draws from his nearly 25 years of investment experience to help clients implement personalized investment strategies.