Categories: Personal Income Tax
Tags: attribution, Income Splitting, Students, tax planning
12 Income Splitting Opportunities
Published on January 21st, 2011
Written by: Tax Guy
Many of the income splitting opportunities have been curtailed by a set of rules known as the attribution rules. When opportunities are available, they can be complex, expensive, and difficult to maintain. However, if you and other family members are in very different tax brackets, the benefits may be substantial.
Record Keeping
Proper records are a must when establishing an income splitting arrangement. If the CRA comes knocking at your door asking questions, you will need prove what you have done was allowed.
You should maintain separate bank accounts and keep detailed records. Avoid transfers between accounts through on-line banking and write cheques to establish a paper trail. Be sure to fully document the terms and repayment of any loans provided as well as documenting how any transfers of property occurred.
Income Splitting Opportunities
- The higher income-earning spouse pays all of the family expenses that are not deductible, including the income taxes of the lower spouse. The lower income spouse then uses their income for investment.
- If a new business is started, allow lower income family members to acquire an equity position. Consult a professional for advice on structuring such an arrangement.
- If you own a business, employ your spouse or children and pay a reasonable salary.
- If the CRAs prescribed rate of interest is lower than investment yields, it may be beneficial to lend funds at the prescribed rate to a family member who reinvests the funds.
- Spousal RRSP’s have a limited potential for income splitting. The goal should be to ensure both spouses have the same income in retirement.
- Split your pension income with your spouse (see our article on Pension Income Splitting). Also, TurboTax has a pension income splitting optimizer to help you decide the right amount.
- Tuition fees do not have to be actually paid by the student to receive the tuition tax credit. A parent may pay the expense and the student may still claim the credit.
- If a related minor or spouse receives a gift or inheritance from a source that the income splitting rules would not have applied, the funds should be held in a separate account and “not” be used for household expenses.
- Property that has the potential to earn capital gains should be given to minor children rather than a spouse.
- If funds are given to a child in their 17th year and a term deposit is acquired where the interest will pay in their 18th year. The interest will be tax in their hands in the following year
- If a child has employment income, lending funds up to an amount to which they would earn from employment, interest free, will free the child’s employment income to earn investment income. The funds lent would then be used for their own purchases.
- Income earned from Canada child tax benefit payments invested in the child’s name will not be attributed.
I am a commissioned sales person. Can I pay my about $5000.00 per year for getting me leads. Can I claim this $5000.00 as I paid salary to wife. How that effect her. She only have about $6000 in rrsp income.
You may be able to employ your spouse and claim the expense as long as you are required to incur these expenses under your contract.
The amount you pay your spouse must be reasonable and reflect what would you would have paid an outside party to do the same work. You must also be able to substantiate that the work was actually done.
I suggest you work with your accountant to structure this correctly.
My husband and I have joint bank accounts. Since I only make a very small amount during the year can I claim 100% of the bank interest on my income tax or do we have to do a 50/50 split.
Split it according your contribution to the account. If your contribution is small, then most is reported by your husband.
After being married for 8 years my ex husband and I divorced in 1981. He is turning 65 this year. Can I claim part of his OAS even though he has been divorced twice since our divorce? We never discussed this at the time.
I don’t understand your question. What about OAS would you claim?
I have started a small business (sole proprietorship) while working full time. I have employed my wife (who does not work otherwise) in this business. I do not expect to make any profit this year.
My question is this: Let us say I make 100K via my Full time job. I invest around 10K in the business and pay my wife 20K and say I make 10K this year.
So total business expenses will be 30K and income will be 10K.
Will this state of affairs result in some tax relief for my income from my full time job. I searched a number of sites but they all leave me confused. Could someone tell me how the tax calculations will be done (high level, approximations).
Thanks,
Peter
In short yes. If your business generates a loss, it reduces your overall taxable income. As a sole proprietorship, you should complete form T2125 and include the amount on that form on Line 135 of your tax return. If there is a profit, it is included with your other income and taxed accordingly. If the business generates a loo, it will reduce your taxable income.
I am wondering- my husband asa sole proprietor who is paying me a non-salaried amount for books and admin. Where do I claim that income, or do I have to be a partner with him? Can it be under other income for me, and what would it be for him?
Thanks.
Hi there. It’s employment income.