Income Splitting in Canada: Tips and Tricks
Income splitting in Canada comes with a set of complex rules. Here’s how to navigate the income tax act so you don’t get into trouble.
The rules governing taxation in Canada are not easy to understand, and few people would risk getting flagged for an audit because they did not adhere to the regulations. Have you ever perused through the tax code? You might be happy to note that there are different tax reliefs and permissible strategies that can considerably reduce your tax obligations. Income splitting is one of these strategies.
Simply put, income splitting involves moving income from one family member, who is burdened with high tax rates, to a lower-earning family member who will pay taxes at a reduced rate. This strategy can significantly lower a family’s tax burden.
When is Income Splitting Inadvisable?
The Canadian tax laws have established attribution rules that are designed to discourage people from transferring particular types of income from one family member to another. If you are flagged by the CRA and found to be guilty of such malpractice, you will have to pay taxes on the income accordingly. The attribution rules apply differently depending on the type of income and with you hope to split the income with. Below is a summary.
- If you hope to split income with your partner, either by gifting assets or cash to him or her in a manner that will ensure that he or she earns income from those assets or by extending a loan to him or her, all investment income shall be taxed in your account.
- If cash or assets are transferred to a child below 18 years, you will incur the taxes on any dividend and interest earned. Capital gains, however, will be taxed on the minor’s account. A minor child is a grandchild, a nephew, niece, or child under the age of 18.
- A gift of cash or assets to an adult child will enable the child to earn income from the gift; such income will not be subjected to the attribution rules. However, if the CRA finds that the gift was made so as to reduce your tax burden, all capital gains and income will be taxed in your hands.
When You Should Split Income
Even with the attribution rules, there are some permissible income splitting strategies in Canada. For example, people who are older than 65 years can allocate up to 50 percent of their annual income to a spouse. Couples can, additionally, choose to split their CPP retirement benefits. Both spouses must, however, be over 60 years old and they must be collecting CPP. Moreover, couples may opt to go for spousal RRSPs: this technique allows a spouse to contribute to the other’s RRSP.
While it is important to pay your taxes, you might want to take advantage of tax reliefs and income splitting strategies applicable to you. E&E Ltd can assist you to minimize your tax burden. Contact us to learn how you can keep more of what you earn.