When you are in the 50% tax bracket, shifting income to a family member with a 20% tax rate, could generate a 30% tax saving. So, it would seem to make sense to transfer as much income as possible to your spouse and children. Of course, it isn’t that easy. The tax department has set up income attribution rules to deprive you of tax benefits gained by shifting income to family members.
The basic rule is that if you transfer any income producing asset to your spouse or child, the income must be reported by you, the transferor. However, there are still a number of available income-splitting opportunities worth exploring.
If you lend or gift property to a child under the age of 18, income from the property generated including interest, dividends and rent is attributed back to you. The exception are capital gains which will be taxed at the child’s rate. In other words, if you buy stocks in the name of your child then any capital gains will be taxed in the child’s hands.
You can also make gifts to adult children and avoid attribution. Keep in mind that any gift of property to a child may result in a capital gain or a recapture of the capital cost allowance.
The attribution rules do not apply to reinvested income. If you transfer stocks to your spouse and he or she uses the income generated to purchase investments, then the income from the new investment will not be attributed back to you.
You are also exempt from attribution rules if you gift or loan money to your spouse and children to conduct business. And you can escape the attribution rules altogether, if you make a loan arrangement.
If you lend money to your spouse or child and charge interest at the CRA prescribed rate, currently set at 2%, then any income earned by the recipients is not attributed back to you. For the income split to work, the family member must pay interest on this loan each year by January 30. You must report the loan interest as income, but the interest is deducted by the family member against investment income.
