Income splitting is a tax strategy used to reduce a family’s overall tax burden. It involves redistributing income from a high-income family member to one with a lower income. This allows you to take advantage of the lower tax brackets of your family members.
To better understand income splitting, EB Conseil Fiscal provides insights on the topic!
What Is Income Splitting: Definition
Income splitting involves transferring part of one family member’s income to another who is in a lower tax bracket. Its goal is to reduce the overall income tax paid by the family.
Different Income Splitting Methods
Pension Income Splitting
Individuals aged 65 and older can split up to 50% of their eligible pension income with their spouse or common-law partner. This includes payments from registered pension plans, individual retirement arrangements, and other eligible pension income sources.
Spousal Amount Allocation
Spousal income splitting allows transferring unused tax credits between spouses or common-law partners, such as credits for education, tuition fees, and medical expenses.
Private Corporation Income
Private corporation owners can pay dividends to family members who are shareholders. This type of income splitting is regulated by the Tax on Split Income (TOSI) rules. These rules prevent misuse by applying a high tax rate on dividends paid to certain family members, with exceptions for those actively involved in the business.
Low-Interest Income Loans
A high-income family member can lend money to a lower-income family member at a prescribed interest rate set by the Canada Revenue Agency (CRA), which is often low. The income generated from investing the loan is taxed at the lower rate of the borrowing family member.
Anti-Avoidance Rules, Exceptions, and Exemptions
The CRA has implemented rules to attribute income and capital gains from property transferred or loaned to a spouse, common-law partner, or minor child back to the higher-income taxpayer. Attribution rules generally do not apply to adult children (18 years and older).
Additionally, family members who actively participate in family businesses can receive income without being subject to TOSI rules.
Benefits of Income Splitting
First, income splitting allows you to take advantage of lower tax brackets for lower-income family members, thereby reducing the overall tax amount. Additionally, it enables you to optimize the use of tax credits and deductions within the family.
Plan Your Income Splitting Strategies with Experts
Income splitting in Canada can provide significant tax benefits, but it is crucial to understand the rules and exceptions to avoid issues with the CRA and prevent penalties. That’s why we recommend consulting a tax specialist or financial advisor to develop compliant and tailored income splitting strategies.
Contact us to discuss your options with one of our advisors!
