Family Tax Planning: How to Reduce Your Household Tax Bill Legally

In Canada, taxation is based on the individual rather than the household. Because the tax system uses progressive marginal rates, a household where one spouse earns $150,000 and the other earns $0 will pay significantly more total tax than a household where both spouses earn $75,000. Family tax planning is the strategic process of distributing income and maximizing credits across the household.

1. Spousal RRSPs

A Spousal RRSP allows the higher-earning spouse to contribute to an RRSP in the name of the lower-earning spouse. The higher earner gets the immediate deduction at their high marginal rate. In retirement, withdrawals are taxed in the hands of the lower-earning spouse, ideally at a much lower rate. Funds must remain in the Spousal RRSP for at least three years before withdrawal to avoid attribution back to the contributor.

2. Prescribed rate loans

For households with significant non-registered investments, a prescribed rate loan can be effective. The higher-earning spouse loans capital to the lower-earning spouse at the CRA's official prescribed rate (locked at the time the loan is made). The lower-earning spouse invests it and pays tax on returns at their lower rate. The lower earner must pay the prescribed interest to the higher earner by January 30 each year. As long as investment returns exceed the prescribed rate, the family achieves a net tax saving.

3. Pension income splitting

Individuals receiving eligible pension income (a defined benefit pension, or RRIF withdrawals after age 65) can allocate up to 50% to a spouse or common-law partner for tax purposes. This instantly equalizes taxable income in retirement and can prevent the clawback of Old Age Security for the higher-income spouse.

4. Medical expenses and donations

Medical expenses and charitable donations generate non-refundable tax credits. To maximize value, families should combine all medical expenses and donations onto a single return. Medical expenses are reduced by an income-based threshold, so it is almost always best for the lower-earning spouse to claim the combined medical expenses. Donations should generally be claimed by the higher earner to maximize the provincial credit value.