Income splitting through a corporation is possible in Canada, but it's heavily restricted by CRA rules designed to prevent tax avoidance. The main legal method involves paying reasonable salaries or dividends to a spouse who is a shareholder or employee, but the income must be genuine and proportional to their actual contribution to the business. Simply transferring income to a lower-income spouse through a corporation without real economic substance will trigger CRA reassessment and potential penalties. When you operate as a sole proprietor, all business income flows to you personally. If your spouse earns little or no income, you're both paying tax at your higher marginal rate on that entire amount. A corporation can create legitimate opportunities to reduce this burden, but only when structured correctly. Income splitting can be particularly valuable for couples with a significant income gap, where one partner has much lower income or is retired. By paying the lower-income spouse a salary or dividend from the corporation, you move that income into their lower tax bracket instead of it being taxed in yours.
Yes, if your spouse performs genuine work for the corporation and the salary is reasonable for that work. The corporation deducts it as a business expense, and your spouse reports it as employment income. You must have proper payroll documentation and issue a T4 at year-end.
Not automatically, but CRA pays attention to dividend payments between spouses. You need formal corporate approval (board resolution or shareholders' meeting minutes) and your spouse must actually own the shares. Informal or undocumented dividend payments are red flags.
You can gift shares, but any investment income generated by capital you gifted to your spouse may be attributed back to you under CRA rules. The safest approach is for your spouse to purchase shares with their own money or from wages they earn.
If you loan money to your spouse to buy shares, CRA requires you to charge at least the prescribed interest rate (set quarterly) or income attribution rules may apply. Currently this rate is low, but it must be charged and actually paid, not just theoretically owed.
Yes. Salary triggers CPP contributions on both the employee and employer side. If your spouse is lower income, this can actually be beneficial because they'll build CPP credits. Use our Salary vs Dividend Calculator to compare the tax impact in your specific situation.