Income Splitting with Children in Canada

Income splitting with children means transferring income from yourself to your children in order to save tax. The reason that you’ll save tax is because you are in a higher tax bracket than your children.

Income Splitting with Gifts – Income Splitting with Children Canada

The first way to income split with minor children in Canada is through the use of gifts.

By way of background, if you give a gift or loan money to your child and your child earns investment income or a capital gain on that gift, then the investment income will be included in your income. Capital gains are not subject to attribution.

For example, assume that you gifted Apple stock 5 years ago to your child, when Apple shares were valued at $10 a share. 5 years later (today), Apple shares are worth $330 a share. Your child, seeing that the share price has gone up significantly, decides to sell those shares. The capital gain on the sale of the Apple shares will be included in your child’s income and not yours. Since your child is in a low tax bracket and likely has a lot of tuition tax credits, he won’t be paying much tax on the capital gain.

Therefore, it’s smart tax planning to gift assets to your child that will appreciate in value, such as non-dividend paying stocks or land. Remember that investment income earned by a child on a gift from his parents is attributed back to the parents. As such, you don’t want to gift assets to your children that will produce investment income.

Income Splitting through the use of Cash Gift for TFSA investments

Income splitting with your adult child can be accomplished by giving a cash gift to your adult child. Your adult child should contribute the cash received to a TFSA. Investment income earned inside a TFSA is not subject to tax and neither are withdrawals. This is a great way for your child to save for university, a car, or a home.

Income Splitting through the use of RRSP’s – Income Splitting with Children Canada

Another way to split income with an adult child is through the use of RRSPs. In this strategy you give a cash gift to your child. Your child then contributes the cash received to his RRSP.

Note that your child should not deduct the RRSP contributions made on his personal tax return at this point in time. The reason being is that your child is in a low tax bracket and can’t benefit from tax deductions on RRSP contributions.

When your child secures a high paying job he should deduct the RRSP contributions that he previously made, because he will be in a high tax bracket at that time.

Any investment income generated inside the RRSP will not be subject to tax and hopefully the RRSP will grow in value over time.

Income Splitting through the use of Corporation – Income Splitting with Children Canada

Income splitting with adult children can also be achieved through a corporation. In this strategy, your corporation makes a loan to your adult child. The loan is included in your adult child’s income. Hopefully your adult child is just entering college at this point and doesn’t have much in the way of income, and will therefore pay little tax on the loan.

Once your adult child secures a high paying job in the future, he will then repay the loan to your corporation. The repayments made will be tax deductible to your child on his tax return.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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