Income Splitting in Canada

Income splitting simply means subdividing your income amongst your family members in order to save taxes. It’s an easy concept to understand but is practically difficult to implement.

As an Accountant Mississauga, I have provided easy-to-follow examples below, which you can use to achieve Income Splitting in Canada.

Split Income with Spouse – Income Splitting in Canada – Accountant Mississauga

“The first way to achieve income splitting in Canada with your family members is through the use of spousal loan,” says Allan Madan, Accountant Mississauga

For example, assume that you have $50,000 of cash available that you would like to invest, and you are the higher earning spouse. If you loan $50,000 to your lower income spouse and have him or her invest the funds, any income earned on the investment would be included in your spouse’s income.

You should charge interest on the loan to make sure it complies with the CRA’s requirements.

Making a loan to your spouse to invest is much better than directly investing yourself, because you are the higher income spouse and any income that you earn on the investment will be taxed at a much higher rate.

Use of Spousal RSP – Income Splitting in Canada – Accountants in Mississauga

“The second way to achieve income splitting in Canada is through the use of spousal RSSPs,” says Accountants in Mississauga, Allan Madan.

Let’s use an example of a married person, Tom, who didn’t consult with their Chartered Accountant in Mississauga. Tom contributes $20,000 to his RRSP each year. While Tom will have a lot of money saved up, he will also have to pay a significant amount of tax when he withdraws that money from his RRSP.

A much better strategy for Tom would be to invest $10,000 in his RRSP and $10,000 in his spouse’s RRSP. As a result, each spouse will approximately have the same amount of RRSP savings.

When Tom and his spouse withdraw funds from their RRSPs, the amount of tax that they will have to pay on a whole will be much less than if all of the RRSP withdrawals were made by Tom and included in his income.

Pay Salaries to Family Members – Income Splitting in Canada – Accountant Mississauga

“The third way to split income in Canada is to pay salaries to family members,” says Allan Madan, Accountant Mississauga.

If you are a business owner, you can pay a reasonable salary to a family member for work that he/she performs. The salary paid is tax deductible.

For example, an excellent way to achieve income splitting in Canada is to pay a salary to your child (who doesn’t have any other source of income), because your child can earn up to $10,320 without paying any tax whatsoever.

Similarly, you may consider paying a salary to your spouse who is in a lower tax bracket than yourself. Note that the salary paid must be reasonable and your spouse must actually be performing some work.

Gifts to Children – How to Income Split in Canada – Accountants in Mississauga

“The fourth way on how to income split in Canada is by giving gifts to your children”, says Allan Madan, Accountants in Mississauga.

Assets which appreciate in value, such as real estate and shares, should be gifted to your child, to save tax.

For example, assume that you gifted shares in a public company to your child and those shares subsequently increased in value from $10,000 to $50,000. When the public company shares are sold by your child, the $40,000 gain (half of which is taxable) would be included in your child’s taxable income as opposed to yours. This is because the Income tax Act of Canada states that capital gains earned by children are not attributed back to their parents.

Imagine if you had bought Apple’s stock at $20/share in the year 2000 and then immediately gifted those shares to your child. Ten years later, i.e. the year 2010, Apple’s stock is worth $300 per share, 1500% more. If your child sold the shares, the capital gain on the sale would be included your child’s taxable income, and not yours, thereby reducing the overall tax paid.

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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