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I admit that I'm not the best at choosing gifts for my wife. Unless I buy her diamonds – which is always a success – I usually fail miserably. But I have a great idea for this Christmas: giving away tax savings.
I'm setting things up so that we'll save about $5,000 next year thanks to an income split. Dividing income requires planning. So why not get things in order before the end of the year to save taxes in 2026? Here are the key ideas to consider.
Lend money to your spouse
On January 16, I wrote about lending money to your lower-income spouse and charging the prescribed interest rate on the loan. Today, that interest rate is 3 percent and it looks like that rate will continue into the first quarter of 2026. If you calculate this interest rate on a loan and your spouse pays the interest on the prior year's interest charge by January 30, your spouse can invest the borrowed money and avoid the attribution rules that could otherwise result in the income earned from the borrowed funds being attributed back to you. A proper spousal credit can allow your spouse to pay the tax instead. Therefore, consider taking out a loan before the end of the year to split income in 2026. For an example, see my January 16 article.
Create a second generation income
Let's say you want to lend or give money to your spouse to invest, but you'd rather not charge interest on the loan. You can still get around the attribution rules if your spouse earns income from the amount you borrowed and then earns income from that income – we call it second generation income. So consider giving your spouse a loan before the end of the year and transferring your spouse's monthly income to a separate investment account. Any income earned in this separate account will be taxed by your spouse and will not be returned to you.
Tim Cestnick: Splitting income with your spouse can save you a lot of tax money if you do it right
Swap assets with a family member
Income splitting involves transferring income to a family member who pays a lower tax rate than you. If you have income-producing assets, consider transferring some of them to a lower-income family member before the end of the year to exchange them for other non-income-producing assets of equal value (e.g., jewelry or half of your spouse's family home, if they paid for it). Because your family member “paid” for the income-producing assets by leaving you equivalent non-income-producing assets, your family member will pay tax on any income earned in their hands after the exchange.
Note that transfers to implement this idea are made at fair market value, so a tax charge may arise if the transferred assets have increased in value. You might consider delaying the transfer until January if taxes may be due on the transfer (this pushes the tax bill to 2026). Visit a tax professional to discuss the idea and do it right.
Let the higher-income spouse cover the costs
If you and your spouse have different income levels and are in different tax brackets, you should plan now for the higher-income spouse to pay a larger share of household expenses beginning in 2026. This frees up the lower income spouse's income for investment. All taxable capital gains can then be taxed at a lower rate for the lower-income spouse.
Agree on a split of CPP benefits
If you and your spouse are in different tax brackets and at least one of you receives or has claimed CPP benefits, you should consider splitting those benefits so that up to half can be taxed in your spouse's hands. This CPP sharing arrangement is reciprocal, so half of your spouse's CPP benefits, if any, are taxable in your hands. But if you're in different tax brackets, this can save you taxes as a couple. Consider requesting this benefit split before the end of the year by contacting Service Canada, which you can do online through your My Service Canada account, and completing Form ISP1002. Application for CPP pension splitting of retirement pension(s).
Yes, couples can income split the CPP in some way
Invest in the name of a minor
You can use some of your money to invest on behalf of a minor child or grandchild by setting up a trust account for the child before the end of the year. Any capital gains earned on the account (but not interest or dividends) are subject to attribution rules and taxed in the hands of the child. In this case, focus on capital growth.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.