February 26, 2019

Income splitting is a dangerous tax game if you don’t know the rules

In Canada, income splitting – the practice of shifting income within a family to avoid high tax rates – is tempting due to steeply graduated tax brackets in many provinces. Anti-avoidance rules make the process tricky; nonetheless, there remain many opportunities to legally use income splitting to lessen one’s tax burden. For example, pension income can be shifted between spouses or partners. Even here, however, taxpayers must be careful, as the CRA will pursue unlawful activity in court.

Key Takeaways:

  • Our Income Tax Act has a variety of anti-avoidance rules, known as attribution rules, meant to block attempts at income splitting by attributing the transferred income back to the original source.
  • Here are the outcomes of three different income splitting scenarios: (1) if you give your minor kids money to invest, then any interest or dividends earned on those funds will attribute back to you but not any future capital gains; (2) if you gift funds to your spouse or partner for investment, all future income as well as capital gains will attribute back to you; and (3) if funds are loaned between spouses or partners at a minimum of the CRA’s prescribed rate, then the attribution rules won’t apply, provided the interest on the loan is paid by January 30 of the following year.
  • The easiest way is to split pension income, which can result in substantial tax savings if one spouse is in a lower tax bracket, and it can also help preserve benefits like Old Age Security.

“If you don’t understand the complex rules surrounding what is and isn’t allowed in income splitting, you could find yourself facing off against the tax man in court.”

Read more: https://business.financialpost.com/personal-finance/taxes/income-splitting-is-a-dangerous-tax-game-if-you-dont-know-the-rules

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