Income Splitting

Income splitting is a family tax planning technique designed to reduce your tax liability by shifting income from a high rate taxpayer to a lower rate taxpayer such as a spouse or children. Unfortunately, there are a number of legislative provisions—“attribution rules” and other anti-avoidance measures—designed to prevent saving taxes by shifting income between taxpayers.

Permitted arrangements

There are still a number of legitimate tax-planning arrangements that can be used to effectively redistribute income in a family unit:

  • Have your business pay a reasonable salary to your spouse or common-law partner or children
  • Make contributions to a spousal RRSP
  • Invest child tax benefit payments in your child’s name
  • Share CPP payments
  • Pension income splitting
  • Have the higher income spouse or common-law partner assume most or all of the personal household expenses, leaving the person with the lower income with as much disposable income as possible to invest.
  • Transfer or sell assets to family members for FMV consideration
  • Gift to minor children capital assets that are appreciating in value so they can earn capital gains not subject to attribution. However, watch certain capital gains on private company shares.
  • Make an income splitting loan.
  • Use a management company. However, if the management company provides services to a professional who provides tax-exempt services under the GST, the taxable GST charge may present an absolute increase in cost that may outweigh the income-splitting benefits of the management company. In these circumstances, a carefully structured revenue or cost sharing agreement may still be tax-effective.
  • Contribute to an RESP.
  • Give cash or other assets to your adult children. Gifts of cash could enable them to maximize their deductible RRSP contributions.
  • Have your spouse or common-law partner and/or adult children participate in an incorporated business by owning shares acquired with their own funds. This would allow company profits to be distributed to them in the form of dividends.
  • Take advantage of the fact that income earned on income is not subject to the attribution rules. Although the initial income earned on property loaned to a non-arm’s-length person may be attributed back to the person making the transfer, income earned on that income will not be attributed.

It’s crucial that you speak with the proper professional, who can review your personal situation and give you advice about which income-splitting strategies best fit your circumstances.

Grant Thornton: