Income splitting (Tax Form T1206) is actually a tax strategy that allows Canadian families to reduce their overall tax liability by distributing income between family members.
By taking advantage of this CRA tax brackets, families can reduce their overall tax liability and can increase disposable income.
Income splitting method is a tax strategy in which income from one family member whose income fall in high income tax rate transfers to another family member with lower income tax rate. This distribution of income can result in lower overall tax liability for a family as whole.
Distributing income to other family members who are in lower tax rate brackets, families can reduce their overall tax liability as whole.
Splitting helps to lower the tax rate for higher income tax payer. Some of their income is shifted to a a family member who is a lower CRA tax bracket taxpayer. It can result in tax savings, especially for families with high income gap between spouses.
It can be particularly beneficial for families planning for retirement. By transferring income to a spouse with a lower income or no employment income, the couple can effectively reduce their combined income during retirement, potentially qualifying them for various income-based benefits and credits.
Families in Canada must meet following criteria to qualify for splitting the income:
1. Spousal Relationship:
Income splitting is generally available to legally married couples or common-law partners.
2. Age Requirement:
Both spouses must be at least 65 years old or have a pensionable disability to benefit from splitting the pension income. However, other forms of splitting of income such as transferring investment income or capital gains are not subject to age restrictions.
3. CPP(Canada Pension Plan) and (RRIF)Registered Retirement Income Fund:
Couples can split eligible pension income received from CPP or RRIF if they meet eligibility criteria.
4. Other Eligible Income:
Some other forms of income like interest, dividends and capital gain can be eligible for income splitting method if they meet eligibility criteria.
T1206 is a tax form used in Canada to report and calculate tax on split income. This tax is designed to prevent high income individuals from reducing their overall tax liability by splitting their income with lower income family members including spouses, children or family trusts.