Understand attribution rules and how to use income splitting strategies

One of the most appealing tax planning ideas for families is income splitting—allocating income to a lower-income family member to reduce overall household tax. However, Canada’s attribution rules are specifically designed to prevent this in most informal cases. The rules reassign certain types of income or capital gains back to the higher-income individual who supplied the original funds, ensuring the CRA taxes it appropriately.

Still, not all income-splitting strategies are blocked, and there are several legitimate and powerful ways to reduce tax by shifting income in a structured and compliant way. The key is knowing where attribution applies, and when it doesn’t.

What Are the Attribution Rules?

Attribution rules reassign income or capital gains to the person who originally provided the capital or asset—typically a higher-income spouse, parent, or grandparent—if no arm’s-length transaction or qualifying exemption applies. The purpose is to prevent families from reducing taxes through informal gifting or transfers that lack economic substance.

Attribution commonly applies in situations where:

• A high-income spouse gives money to a low-income spouse for investment

• A parent contributes to an account in a child’s name

• Property or investments are transferred without adequate payment or a formal arrangement

When these rules apply, the income is taxed in the contributor’s hands, not the recipient’s—even if the legal ownership lies with the spouse or child.

How Attribution Rules Apply by Income Type and Recipient

Common Income Splitting Strategies 

Although attribution rules are strict, there are still many legitimate income splitting opportunities that families can take advantage of. These include:

1. Spousal RRSPs

A higher-income spouse contributes to a spousal RRSP in the name of the lower-income spouse. The contributor gets the deduction, and when the funds are withdrawn in retirement, the income is taxed in the lower-income spouse’s hands—if attribution conditions are met.

• Effective when the lower-income spouse is expected to be in a lower tax bracket in retirement

• Withdrawals must occur at least three calendar years after the last contribution to avoid attribution

2. Prescribed Rate Loans

One of the most powerful tools available, this strategy involves loaning money to a spouse, child, or family trust at the CRA’s prescribed interest rate (currently low). The recipient invests the funds and earns income beyond the interest cost.

• Interest must be paid by January 30 each year to avoid attribution

• Income earned in excess of interest is taxed in the recipient’s hands

3. Gifting to Adult Children

Attribution rules do not apply to adult children (18 and older) when gifting capital. Any income or capital gains earned on that capital is taxed in the child’s hands.

• Good option for early wealth transfer

• Also effective when funding a child’s TFSA or RRSP, as future income is tax-sheltered

4. Family Trusts

Trusts can be structured to allocate investment income to beneficiaries in lower tax brackets. Attribution rules may still apply depending on how the trust is funded and structured, but with proper legal planning, a trust can serve as a long-term income-splitting vehicle.

Important Considerations

Before implementing an income splitting strategy, ensure the structure:

• Meets CRA compliance requirements

• Involves a real transfer of control or risk

• Has documented loan agreements (if applicable)

• Follows all required interest payments and timelines

Avoid informal transfers, undocumented loans, or assumptions about ownership. Attribution rules are specifically triggered when tax-motivated transfers lack substance or legal structure.