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FAMILY INCOME SPLITTING: SHIFT ASSETS BETWEEN SPOUSES
12-01-2015
Generally speaking, income splitting is the process of redirecting income within a family group to take advantage of the lower tax brackets, deductions, and credits available to each family member. Income is split by transferring income-earning assets from high-income earners to lower-income family members. The total tax on family income will be lowest when each member earns approximately the same level of income.
The Income Tax Act stipulates that where an individual has transferred or loaned property either directly or indirectly (by means of a trust or by any other means), for the benefit of the individual's spouse, or a person who has since become an individual's spouse or, as of 1993, a common-law spouse, any income or loss from the property and any capital gain or loss on the disposition of the property will be attributed back to the individual.
This means that even though the spouse is now receiving the income, the individual still pays the tax on it at his or her marginal tax rate.
So the family is no better off than if the transfer or loan had not been made.
Attribution with respect to minor children
income on property transferred or loaned, directly or indirectly (by means of a trust or by any other means), to a related minor child is attributed back to the transferor or lender.
This rule only applies where the child is under 18 at the end of the year. It generally does not apply to capital gains or losses on disposition of the property by the child.
Transactions covered by this attribution rule are those in which the taxpayer and child are "not dealing at arms length' - these generally include the taxpayer's child, grandchild, great-grandchild, his/her spouse's child, his/her child's spouse, his/her brother, sister, brother- in-law, sister-in-law, etc., and for the purposes of this rule include the taxpayer's niece or nephew.
Attribution on loans to other family members
Attribution will also apply to loans, but not transfers, to other family members (such as children who are over 18) if one of the main reasons for the loan was to achieve income splitting and reduce taxes.
Loans for non-investment purposes, such as to pay tuition fees, are not covered by this attribution rule because no income is earned on these loaned funds.
Footnotes: Footnotes: This column is presented as a general source of information only and is not intended as a solicitation for business. It is always recommended that you consult a qualified tax professional beforeembarking on any of the suggestions outlined above. Mohammed Yasin, CGA, is the principal of M. Yasin & Co. Inc., Certified General Accountants and has offices in Vancouver & Surrey,B.C. For more information on this topic or any other taxation matters, please contact taxes@alameen.ca.
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