Income Splitting
A tax reduction strategy employed by families living in areas that are subject to bracketed tax regulations. The goal of using an income-splitting strategy is to reduce the family's gross tax level, at the expense of some family members paying higher taxes than they otherwise would.
Investopedia Commentary
An example of income splitting is a higher-income family member transferring a portion of their income to a lower-income family member through some legal means, such as hiring the lower income family member to work for them, and deducting the cost of the labor as a legitimate business expense. Though the family still earns the same level of money, the overall amount of tax they pay is reduced.
Another example is the transfer of tax credits from a lower-income family member to a higher-income family member. This can be done by transferring tuition credits from students to parents funding their children's post-secondary educations.
In Canada, an income-splitting technique can be used to reduce tax liability through RRSP contributions because money contributed to RRSPs is tax deductible. A higher-income family member can contribute to a lower-income family member's RRSP, thus lowering their overall tax liability and potentially moving the higher-income family member into a lower tax bracket.
Related Links
Registered Retirement Savings Plans
Pros And Cons Of Offshore Investing
See also: Registered Retirement Savings Plan - RRSP, Regressive Tax, Tax Bracket, Tax Credit, Tax Shelter, Tax Shield