Weekly Tax Tips
Family Income Splitting Opportunities
2 Jul 2010
Generally speaking, income splitting is the process of redirecting income within a family group to take advantage of the lower tax brackets, deductions, and credits available to each family member. Income is split by transferring income-earning assets from high-income earners to lower-income family members. The total tax on family income will be lowest when each member earns approximately the same level of income.
Opportunity to consider: Ensure the high-income spouse pays all family expenses, while the low-income spouse saves.
Often, both spouses contribute equally to household expenses, where each have a source of income. This may seem fair and reasonable, but it’s poor tax planning. To the maximum extent possible, the low-income spouse’s salary and other earnings should be saved for investment purposes, while the higher income spouse pays for expenses such as food, clothing, mortgage payments etc. You can even pay your spouse’s taxes. This ensures that the family’s total investment income is taxed at the lowest possible rate.
Opportunity to consider: Pay your spouse’s interest-bearing debts.
If your spouse has incurred interest-bearing debts such as a car loan, consider paying off these debts on behalf of your spouse. The reduction in interest expense is not subject to attribution. Your spouse will then have more funds to invest in the future. Note that this plan does not work if the debts were incurred to acquire income-producing properties. If you pay off these debts, any income from the properties will attribute to you.
This tax tip is a publication of BDO Canada LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this tax tip is current as of 2 Jul 2010.
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