Income Splitting is a tax planning strategy designed to shift income from a taxpayer paying a high rate of tax to another taxpayer paying tax at a lower rate. The Income Tax Act has many provisions attempting to limit income splitting, but you should be aware of the opportunities. Some of them can be found below:
- If you own a business, pay a reasonable salary to your partner or children;
- You may also use dividends to distribute corporate profits at a lower tax rate.
- Make contributions to a spousal RRSP;
- Invest child tax benefit payments in your child’s name;
- Share CPP payments;
- Pension income splitting;
- The higher income partner assumes all of the personal household expenses, leaving the the lower income partner with as much income as possible to invest;
- Transfer or sell assets to family members for Fair Market Value consideration;
- Gift to minor children capital assets that are appreciating in value so they can earn capital gains not subject to attribution;
- Use a management company;
- Create testamentary trusts to split income;
- Contribute to an Registered Education Savings Plan;
- Give cash or other assets to your adult children;
- Take advantage of the new Family Tax Cut;
- 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.
All of the above are ways of reducing your tax bill, however, income splitting must be done properly or you are at risk of the attribution rules, and having the Canada Revenue Agency undo your attempt at income splitting. If you have the potential for income splitting and are not taking advantage of that opportunity, you should Barrett Tax Law a call to see how much we can save you.