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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.
pro-tip

Pro Tip

ACCESSING THE SMALL BUSINESS DEDUCTION IN YOUR BUSINESS

The Small Business Deduction gives businesses a tax deduction on the first $500,000 of income. This saves an eligible corporation around up to $50,000 in income taxes. There are a number of conditions that have to be met to be eligible for this deduction.

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pro-tip

Pro Tip

ACCESSING THE SMALL BUSINESS DEDUCTION IN YOUR BUSINESS

The Small Business Deduction gives businesses a tax deduction on the first $500,000 of income. This saves an eligible corporation around up to $50,000 in income taxes. There are a number of conditions that have to be met to be eligible for this deduction.