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Tax Tips - January 15,
2001
Tax
Saving Strategy: Income Splitting
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The more you earn, the more tax you pay.
Income splitting is a family tax
planning technique designed to shift income from a high rate taxpayer to a
lower rate taxpayer such as a spouse or children.
Revenue Canada's tax attribution rule stipulates that if you give money to your
spouse or child who then invests it, you will have to pay tax on any income earned,
even though you may not get to spend the income.
But
there are a few income-splitting strategies that can be legitimately
used to shift a certain amount of income or capital gains from high income to low income
family members.
1. Start a spousal RRSP
The higher-income spouse can contribute to a spousal RRSP. Once the money has
been in the plan for three years or more, any withdrawn funds become income for
the spouse.
2. Split with your spouse
You won't get taxed on income earned when your spouse reinvests interest income
earned on money you contributed. Suppose you gave your spouse $10,000 and your
spouse invested it to earn $1,000 in interest. The $1,000 is taxable income to you
unless it is reinvested by your spouse. Interest earned on the $1,000 would be
considered your spouse's income.
3. Hire your children and/or your spouse
If you run a business, your spouse and children can be paid reasonable salaries which
become a business expense.
4. Split with your children
If the money you transfer to a minor child earns capital gains instead of interest or
dividends, the income would be reported on your child's tax return, not on yours.
This reduces the tax paid by the family provided your child earns less than you do. If
you bought $5000 worth of mutual funds for your daughter, she would earn any
capital gains income and pay tax based on her total income.
5. Child tax benefit investments
Attribution rules also don't apply to earned income on investments bought in a child's
name with the Child Tax Benefit provided an account was established for the child.
Talk to your accountant or financial adviser to see whether these ideas would work
for your situation. Careful documentation is important should Revenue Canada
challenge your claim.
