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Income Splitting An Inheritance

So your children are all grown up. They’ve moved away, attended university and have an established career. If your children’s annual income is more than $125,000 a year, consider leaving them their inheritance through a trust established in your will.

Canada’s personal income tax rates are progressive. This means that as your income increases, you will pay higher rates of income tax on each additional dollar you earn. A trust that is included in your Will and established upon your death can also take advantage of these progressive rates and are an excellent opportunity to split income [1].

The Incremental Inheritance

The table below shows how the income earned on a inheritance $500,000 is taxed based on whether it was received directly or in a trust. Assuming the beneficiary is a resident of Ontario and has a marginal tax rate of 46.4% on regular income.

TypeDirectThrough
A Trust
Interetance Received$500,000$500,000
Interest Income Earned (5%)25,00025,000
Beneficaries Tax Marginal Tax Rate (46.4%)(11,600)-
Trust's Tax Rate (21.05%)-(5,263)
After Tax Income$13,400$19,738

You can see that the benefits can be substantial flowing the income through a testamentary trust.

A Variation

If you want to leave an estate but are concerned you will not have enough at death, a variation of this strategy creates the trust in your Will and funds it from a life insurance policy.

[2]