Income splitting with family members
Income splitting is a tax-planning technique designed to shift income from a taxpayer paying a high rate of tax to another taxpayer within the family unit paying tax at a lower rate. 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.
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 (see topic 5).
- Make contributions to a spousal RRSP (see topic 55).
- Invest child tax benefit payments in your child’s name (see topic 97).
- Share CPP payments (see topic 112).
- Pension income splitting (see topic 71).
- Family tax cut non-refundable credit of up to $2,000 (see topic 79)
- 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 (see topic 109).
- Gift to minor children capital assets that are appreciating in value so they can earn capital gains not subject to
attribution (see topic 109). However, watch certain capital gains on private company shares (see topic 114).
- Make an income splitting loan (see topic 109).
- 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.
- Create testamentary trusts in your will to split income.29
- Contribute to an RESP (see topic 110).
- Give cash or other assets to your adult children (see topic 109). 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 confer with your tax adviser, who can review your personal situation and give you advice about which income-splitting strategies best fit your circumstances.
29 See Topic 154 on upcoming new testamentary trust rules.