Many of the income splitting opportunities have been curtailed by a set of rules known as the attribution rules. When opportunities are available, they can be complex, expensive, and difficult to maintain. However, if you and other family members are in very different tax brackets, the benefits may be substantial.
Proper records are a must when establishing an income splitting arrangement. If the CRA comes knocking at your door asking questions, you will need prove what you have done was allowed.
You should maintain separate bank accounts and keep detailed records. Avoid transfers between accounts through on-line banking and write cheques to establish a paper trail. Be sure to fully document the terms and repayment of any loans provided as well as documenting how any transfers of property occurred.
Income Splitting Opportunities
- The higher income-earning spouse pays all of the family expenses that are not deducible, including the income taxes of the lower spouse. The lower income spouse then uses their income for investment.
- If a new business is started, allow lower income family members to acquire an equity position. Consult a professional for advice on structuring such an arrangement.
- If you own a business, employ your spouse or children and pay a reasonable salary.
- If the CRAs prescribed rate of interest is lower than investment yields, it may be beneficial to lend funds at the prescribed rate to a family member who reinvests the funds.
- Spousal RRSP’s have a limited potential for income splitting. The goal should be to ensure both spouses have the same income in retirement.
- Split your pension income with your spouse Pension Income Splitting.
- Tuition fees do not have to be actually paid by the student to receive the tuition tax credit. A parent may pay the expense and the student may still claim the credit.
- If a related minor or spouse receives a gift or inheritance from a source that the income splitting rules would not have applied, the funds should be held in a separate account and “not” be used for household expenses.
- Property that has the potential to earn capital gains should be given to minor children rather than a spouse.
- If funds are given to a child in their 17th year and a term deposit is acquired where the interest will pay in their 18th year. The interest will be tax in their hands in the following year
- If a child has employment income, lending funds up to an amount to which they would earn from employment, interest free, will free the child’s employment income to earn investment income. The funds lent would then be used for their own purchases.
- Income earned from Canada child tax benefit payments invested in the child’s name will not be attributed.