Accountants often call the income splitting rules attribution rules. The term attribution simply means to attribute income back to the original person and effectively stop any attempt to income split.
Who Do The Income Splitting Rules Apply To?
The rules that are designed to prevent income splitting apply when you attempt to shift income to any one of the following people:
- Your spouse or common law partner,
- Any person who is under age 18 and are your children, grandchildren, nieces and nephews.
- Any person you are not dealing with at arms length, and
The rules are applied differently for each type of person listed above.
Income Splitting Between Spouses
The income splitting rules were designed to prevent you from giving your money or using a joint account to split income. If you do transfer property (for example, stocks) to your spouse directly or indirectly, the Income Tax Act says:
- The transfer is at your original cost, and
- All income and future gains will continue to be taxed your hands.
In the end, there is no tax when you transfer ownership and you continue to pay the tax just as you always had.
As luck would have it, you can still income split with your spouse if:
- Your spouse purchases the property from you with their own funds and at fair market value.
- You lend the funds to your spouse to purchase the property from you. The loan must be documented with repayment terms. Interest at the prescribed rate must be paid within 30 days of the end of the year. Of course, you include the interest as income on your tax return but your spouse can deduct the interest paid on their tax return provided the loan was used to buy income-producing investments such as stocks.
Spouses can now split eligible pension income and TurboTax has a pension income splitting optimizer to help you decide the right amount.
Income Splitting With Children
The income splitting rules are a little different when it comes to children under the age of 18. As mentioned above, these rules apply if you give or lend income producing property such as stocks or other investments to a minor who is your child, grandchild, niece or nephew.
When you transfer property to a minor, the Income Tax Act says:
- The transfer is deemed to be at fair market value, and
- You will continue to be taxed on income such as interest, dividends, rents and royalties, until the child is 18.
When you give or transfer property to a child, you will have a capital gain or loss and all future gains and loses are taxed to the child. However, you still have to pay tax on the investment income until the child turns 18.
You can get around the investment income attribution if the child purchases the property from you at fair market value and pays with their own funds. In this case, all of the taxes going forward are taxed in the childs’ hands.
Tax on Split Income (Kiddie Tax)
The so-called kiddie tax was introduced to reduce some of the benefits of other types of arrangements such as family trusts by applying the top marginal tax rate to all income. In addition, this income is also not eligible for deductions or tax credits (other than the dividend tax credit).
There are a number of pitfalls that can result from these types of arrangements and professional advice should be sought.
Secondary Income Can Be Split
When the income splitting rules do apply, they will only affect the first generation received from the initial transfer. Income earned from reinvestment of the first generation income is not subject to the attribution rules.
For example, if $1,000 of interest was subject to the income splitting rules and taxed in your hands, then income earned from the re-investment of the $1,000 would not.
Other Rules Affecting Income Splitting
- If a spouse or minor child has an existing commercial rate loan, a new loan or interest free loan cannot be substituted.
- The Income tax Act does not permit funds to be lent to an unrelated third party who then lends the funds to the spouse or related minor.
- A loan guarantee cannot be used to avoid the income splitting rules. A higher income spouse cannot avoid the rules by providing a loan guarantee on a low rate or interest free loan to a spouse.
- There is a variety of other rules in the Canadian Income tax act designed to prevent income splitting through a trust or corporation.
Related Articles
- Income Splitting With Loans To Your Spouse
- Income Splitting Using Loans To Your Spouse
- 12 Income Splitting Opportunities
- Canadian Income Splitting Guide
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hi there
my husband started a new job in sept. from sept-dec he made 48k. we need to know how to split. for 2011 his income will be over 120k
can he loan me money to start a daycare at home because i have 4 school age kids and any jobs out there require evenings. he works away for 3 months at a time. or should he start his own business and put me on salary and claim all the expenses.
I can’t provide you advice, but he can lend you money to start a business and the business income would be taxable to you. You need to be careful and get advice.
You will not be able to split income already earned.
Hi,
I’m not sure I understand the differences in income splitting between spouse and children.
I have already loaned x (via callable loan) to my wife at 1%, and she pays the interest to me during January.
Can I do the exact same loan agreement with my 2 yo?
Thanks.
If you give funds to your child, the interest and dividends are taxed in your hands but capital gains are taxed in their hands. With your spouse everything continues to be taxed in your hands.
The loan to your spouse circumvents this and causes all investment income to be taxed in your wife’s hands. A loan to your child would have the same effect.
I was married in March of 2010. Both my husband and I receive pension income. My income is from a defined benefit plan while he receives from a defined benefit plan plus CPP. His gross income is a little over $12 000 a year while mine is a little over
$38 000. Is income splitting an option since he lost his right to receive an HST refund because our combined incomes was over the allowed limit?
You’ll have to do the math and look at the impact on your tax credits. But there may be some benefit.
My wife became a permanent resident in Feb/2010 and did not get a job until November. So her income ($6000) is much lower than mine ($69000). Is there any options to increase the refund ie. such as her being a dependant until she started working or splitting the income so that we are taxed at lower rate
At $6,000 she will not pay any tax and you may be able to claim her under the spousal credit for about $4,000 federally. Depending on your province this would save you the tax on her $6,000 of income and about $800 of additional tax savings.
im self employed. is it possible to pay my wife for handling my books? And would this not be considered a form on income splitting?
thx,
Mark
Mark,
Sure you can pay your wife and yes it is income splitting. The limit is that the work must be actually done (and you need to prove it with a time sheet or some other record) and the amount you pay her is no more than what you would pay someone unrelated t0 you to do the same work.
Is there a form or accepted ‘proof’ for gifting publicaly traded shares to a child under the age of 18?
Jeff,
the change in the name on the certificate or deposit to the childs ITF account is the proof!
Hi,
In 2010, my husband lent me $ 70,000 so we can purchased the home together(under both names). Is that considered a income splitting? We also made a note that he lent me money at interest rate of 3%. Does it have to show that money in my bank first or? The whole downpayment amount was came out of his bank.
Please let me know. Thanks so much in advance
Hi beh,
I’m not sure I understand. Did you buy a principal residence? If so, what income would you split?
Hi Tax Guy,
Just wondering, so it is not possible to combine my income (65000) with my common – law partner’s income (25000) and then split the income 50/50 so that the high income earner will be in a lower tax bracket and recieve a larger tax return?
That’s right.
Hi.
I own 2 propertie sand my husband & I own 2. My husband has always been the ‘handy man’ on all properties. Can I write off his wage somewhere? Also, I have claimed the 100% ownership on all even though we are both on title of 2. Do iI have to change that?
Its hard for me to say but it is possible to pay a spouse a reasonable wage for work. The payment must be no more than you’d pay an unrelated third party and the work must actually be done.
I wish to give my brother $40,000 for university. I would need to withdraw this from my corporations bank account. Can I just give him the money, and if i do is it considered a payment to me-the only shareholder? Should I loan him the money and at what rate? Does he ever have to re-pay? I don’t want to include this in personal income but I do want him to have the money.
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