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.
Looking For Professional Help?
If you’re looking for advice or tax planning services, you can contact me directly through my professional tax practice.
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 Tax Guy – I have a question regarding an earlier comment (June 7 2010).
>>3. The higher income spouse pays… the taxes of the lower income spouse.
I may be missing something here, but is this reported as a deduction?
Thanks,
Josh
No. The objective is to free up cash of the lower income spouse, so that the lower income spouse can use the extra money to invest.
If Jane earns investment income of $35,000 per year, then when tax time comes and Jane has to remit $6,000(ish) of income tax, John pays the bill, as well as all other family expenses (groceries, clothing etc.). This leaves Jane with $35,000 to invest and earn taxable income in her name as opposed to $35,000 less her taxes and other expenses she pays.
Hi Tax Guy,
I am a full-time student. My parents have a few rental properties. During holidays, I did some contracts with them and get paid. For example, they paid me $3000 for digging the rental property foundation to fix the basement leaking. I earned 20,000 last year from them. My question is what kind income I should report as. Should my parents issue me a T4 slip? I am over 18 year old. Thanks
Jay,
You’d claim it as self employment or employment income and they dont issue a T4 because you are casual labour.
My husband is 58 years old, he recently retired and is collecting a pension from his work. I am 57 years old and work part time. Can his pension income be split with me (since we are both under 65). Thanks, Gen
If your husband’s pension is from a superannuation (defined benefit) pension plan then he can split the income with you on your tax returns. Use CRA form T1032.
Hi Tax Guy,
Can a loan, at the CCRA prescribed rate, be given to son/daughter child under in avoid attribution of investment interest and dividend income to the parent? No transfer of assests and investments made by loaned money. I undertand that this is valid for a spouse.
Mike
Yes. The loan should be set up with repayment specific terms and the interest must be repaid by the child within the prescribed time frame annually.
The parent must include the interest from the loan as income and the child could deduct it.
Hellio, I am trying to learn the Canadian Income Tax rules. I bought a copy of Byrd & Chen’s Tax Principles, but I find it hard going. I came across your article on Income Attribution and found it very easy to understand, easier than Byrd & Chen, s book. Anyway, I am wondering if there is a book or something like it that I can use that is easier than the book I am using now? If you could help, it would be great! thanks for your time, all the best. Barb
Byrd & Chen is really the best book. It was written for tax students. There other books out there that are also used as texts books (Taxation in Canada – Janet Denhamer and Introduction To Federal Income Taxation in Canada – Beam et. al.).
If the learning is just for general knowledge only (i.e. you are not a tax student!) the Taxation for Dummies is actually a pretty good resource.
It really depends on what type of tax you want to learn (personal, corporate, trust, administrative, excise, international, etc.) and the scope (the concept of income, business income, property income etc.).
Could a loan be made between adult siblings for a mortgage payment on their principal residence without charging interest under the prescribed rate?
I would think it shouldn’t qualify as an investment loan, nor is it really tax advantageous either, and therefore shouldn’t fall under the attribution rules?
Let’s assume that no rent is being derived from the residence either, but the residence probably does increase in value.
Attribution does not apply to adults.
If you don’t charge interest, then you really have no recourse. I’m not of the opinion this is a tax matter but rather a pure legal contract issue.
Hrmmm, this link seems to say it’s kosher, but I’d still like to hear your input:
http://www.theglobeandmail.com/globe-investor/article1784711/
Those strategies can work. The loan for investment strategy would have to be for substantial dollars to be worth the effort and administration.
Here are some of my articles on income splitting:
The right and wrong way to split income
Income splitting opportunities in Canada
Using trusts to income split
Income splitting with loans
This article is about lending money to a spouse who uses the funds to invest. Interest MUST be charged AND paid.
My US citizen husband living with me in canada has a tfsa account, do you know whether he has to claim the interest on his us forms? probably does.. He will also start collecting his company pension next year at 55 …. can he split the income with me? thank you
Finally, he should be aware that Canadian mutual funds may fall within the PFIC rules which he may have to file additional disclosures in future years. For now he may have to file form 3520 if he owns mutual fund trusts.
American’s residing in Canada have highly complex tax issues and he’s best to discuss this with his own accountant.
If his pension is qualified pension income, then he may be able to split it. Try the CRA Q&A.
Hello friendly and informative Tax Guy,
About 25 years ago we set up a non RRSP investment account in my wife’s name but we both took the opportunity to invest in the account. Now we would like to transfer in kind into my RRSP account so I might receive the tax benefit. Could this be done with my wife’s consent and it not being considered a gift or should we now create a joint account?
My wife has recently retired and I have a very l
Hello Dan,
The tax law in Canada requires that each spouse in a marriage account for each and every dollar brought to the marriage and earned during the marriage. You could contribute to your RRSP in proportion to the amount you contributed to the non-registered account.
Thanks Tax Guy so I think you are saying it really does not matter whose name is on the non RRSP investment account it is really whose investments are in the account. So following that logic would my wife be able to authorize transfer of stock from the account in her nameinto my RRSP without triggering a deemed disposition as it really are my investments? Or should we just create a joint investment account and have the investments transferred to that account which would allow me to transfer the stocks into my account and trigger the disposition in my name?
This is like a new language and culture I must learn!
An RRSP is a separate entity and transferring assets to an RRSP or TFSA triggers a disposition for tax purposes. If there is a gain, it is fully taxable any losses are denied. You would be able to use the RRSP contribution as a deduction.
If the intent is to place the assets in the retirement account and allow them to grow tax deferred, then there it is a benefit to do so despite any gains since the gain is 1/2 taxable and the contribution is fully deductible.
From a tactical point of view speak to your broker as they may not allow you to make a contribution from a joint account. You may have to move to an individual account first (which would not be a disposition for tax purposes).
I would suggest you read the following articles:
The Right and Wrong Way To Split Income.
Income Splitting Rules.
http://blog.taxresource.ca/deemed-disposition/
http://blog.taxresource.ca/rrsps-versus-non-registered-accounts/
Or any of the articles in the RRSP Guide
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