Is it mandatory to apply for income splitting even if a couple don’t claim for it? Any disadvantages and advantages for both?
Income splitting is an optional method for reducing the tax burden of a higher-earning spouse, and shifting it to the lower-earning one. It operates to spread the couple’s total income for tax purposes so that it is more evenly spread as between themselves.
However, income splitting is fully optional, and should ideally be done after receiving advice from a qualified financial advisor. The advantages are that if applied, the couple’s overall tax obligations will be lower than what would be the case otherwise. As for disadvantages: There are likely to be none, provided that it is properly done and complies with what are known as the Anti-Avoidance Rules in the Canadian Income Tax Act. Those rules prevent income splitting in certain scenarios; if they are not adhered to, then the income amount will be considered transferred back to the original source, i.e. the spouse who is in the higher tax bracket.