Income Splitting and Income Attribution Rules
Basic Principles of Income Splitting
Tax liability is individually determined. Each Individual’s income is taxes based on rates applicable to tax brackets that don’t take into account their spouse’s income. Marginal tax rates increase as income increases. Being able to divide income amongst family members can reduce or even eliminate income tax.
This does not mean that a person can just choose who reports their income. Income has to be reported by the beneficial owner of the income. This prevents taxpayer’s making arbitrary decisions about who will report and pay tax on income within a family. Income earned in joint accounts must be allocated between holders on a basis of their interest in the underlying assets.
Opportunities to split income between spouses and children may exist. However, taxpayer’s must be careful not to run afoul the income attribution. These rules have been specially designed to prevent income splitting among related parties. However, these rules only apply to income from property and not to income from a business.
What are the attribution rules?
Attribution rules require the income from property, legally earned by one person, to be included in the income of another person. These rules generally apply to below fair market value transfers of income producing property, or to loans to purchase income producing properties that are not subject to appropriate levels of interest payable.
Legitimate methods to Split or Transfer Income
Income splitting can be effective in circumstances, including:
- Transfers at Fair Market Value;
- Splitting capital gains with minor children;
- Joint election to split pension income (T1032);
- Use of trusts;
- Use of “secondary” income;
- Spousal RRSP contributions and withdrawals; and
- RESP contributions.
Disclaimer: Articles are for general information only and do not constitute tax advice. They cannot be relied upon.
Sam Faris is a Toronto-based Chartered Professional Accountant who practices as an independent consultant on high-level Canadian tax matters and handling disputes with CRA.He also published an article recently in the business magazine: HERE.