Income splitting is a popular tax strategy that allows high-income earners to shift their income to family members who are in a lower tax bracket, resulting in a reduction of overall tax payable. Income attribution rules were introduced to prevent taxpayers from using this strategy excessively to avoid paying taxes. This blog post will cover everything you need to know about income splitting and income attribution rules.

What is Income Splitting?

Income splitting is a tax planning strategy that involves transferring income to a lower-income spouse or children to reduce the amount of tax that a high-income earner must pay. Income splitting can be done in several ways, such as through salary, dividends, or capital gains.

Income Attribution Rules

Income attribution rules are designed to prevent taxpayers from using income splitting strategies excessively to avoid paying taxes. The rules are complex and apply to specific types of income and situations, including spousal loans, gifts to minor children, and income earned from property transferred to a minor child.

Spousal Loans

A spousal loan is a loan from one spouse to another, where the receiving spouse uses the loaned funds to invest in income-producing assets. The income attribution rules apply to spousal loans to prevent the higher-income spouse from lending funds to the lower-income spouse at a low-interest rate, resulting in income splitting.

The rules state that if a loan is made between spouses, the interest rate on the loan must be at least equal to the CRA’s prescribed rate. Any income earned on the loaned funds will be attributed back to the spouse who made the loan.

Gifts to Minor Children

If you gift money or property to your minor child, any income earned from that property will be attributed back to you as the parent. The income attribution rules apply to prevent parents from shifting income to their children and avoiding taxes.

To avoid income attribution, you can gift money or property to an adult child or a trust. In this case, any income earned from the gift will not be attributed back to you.

Income Earned from Property Transferred to a Minor Child

If you transfer property to a minor child and the property generates income, the income attribution rules will apply. The rules state that any income earned from the transferred property will be attributed back to you as the parent.

However, there are exceptions to the rules. If the transfer is made to a trust, or the minor child is disabled, the income attribution rules may not apply. It is important to consult with a tax professional to determine the best strategy for your situation.

Conclusion

Income splitting and income attribution rules can be complex and confusing. It is important to understand the rules and how they apply to your situation. A tax professional can help you navigate these rules and develop a tax plan that is compliant with the law.

At JTT Accounting, we offer a wide range of accounting services to individuals and businesses in Toronto and Ontario. Contact us today to schedule a consultation and learn more about how we can help you with your tax planning needs.