Income Splitting

1
Income Splitting

• Business 4099

2
Why Income Splitting?

• The Canadian tax system uses progressive tax
  rates (the marginal tax increases as taxable
  income increases)
• approx. 27 on income up to 29,590
• approx. 41 on income from 29,590 to 59,180
• approx. 50 on income over 59,180.
• Tax payable on two 30,000 incomes will be
  significantly less than that on one 60,000 income

3
Income Tax Act

• Contains a number of measures to prevent the most
  obvious kinds of income splitting strategies,
  however, some opportunities do exist. E.g.
• increase the lower-income spouses investment
  base
• employ your spouse and children
• transfer of business assets
• spousal loans
• reinvesting attributed income
• transfers for fair market value
• transferring capital property to children
• spousal RRSP
• your childrens employment income
• assignment of CPP benefits

4
General Anti-Avoidance Rule

• The Act provides a general anti-avoidance rule
  applicable to all transactions.
• If you come up with a way of avoiding the
  attribution rules that is not caught by existing
  rules, but is a misuse or abuse of the Income Tax
  Act, it may be caught by GAAR.

5
Rules that prevent Income Splitting

• Indirect payments
• a payment or transfer made pursuant to the
  direction of, or with the concurrence of a
  taxpayer to some other person is to be included
  in the taxpayers income to the extent it would
  have been if paid to the taxpayer for example,
  if you direct your employer to pay some part of
  your salary to your childs account, that income
  will still be taxed in your hands.

6
Rules that prevent Income Splitting

• Attribution Rules
• these rules attribute income from property back
  to the person who transferred or loaned the
  property.
• Example lets say you transfer or loan a bond
  portfolio to your spousethe income from that
  portfolio will taxed in your hands
• exception if you transfer for fair market
  value consideration and report the resulting
  gain, the rule will not apply.

7
Income Splitting Opportunities

• Increasing the lower-income spouses investment
  base
• the higher-income spouse should pay household
  expensesleaving the lower income spouse more
  disposable income for investing for future
  income.
• Pay your spouses tax bills with your own funds
• simply make sure that the cheque paying your
  spouses taxes is drawn on your own account.
  Since the amount you pay goes directly to the
  government and is not invested by your spouse,
  there is no property from which income can be
  attributed. The result is that any funds your
  spouse would otherwise use to pay income taxes
  can be invested with the income being attributed
  back to you.

8
Income Splitting Opportunities

• Pay the interest on your spouses investment
  loans
• if your spouse has taken out an investment loan
  from a third party, consider paying the interest.
• There will be no attributed provided you do not
  pay any principal on account of the spousal loan
  (Since the amount you pay is not actually
  invested by your spouse, there is no property
  from which income can be attributed.)
• this technique will also preserve your spouses
  assets and thereby increase his or her investment
  income.