Weekly Tax Tips
More Family Income Splitting Opportunities
23 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: Make gifts to adult family members.
If you support adult family members, such as children at university or elderly parents, consider giving them assets which they can invest to earn their own income. The income will be taxed in their hands, not yours, and they’ll have more after-tax funds than if you had earned the income and paid their expenses.
This situation can arise where an adult child needs money for his or her education, or where your parents are dependent on you for support. Bear in mind that a gift means you give up control of the asset. If making gifts to low-income parents, you may want to ensure that the assets will be left to you in their wills. Also, if you give property other than cash to any relative, you’re deemed to dispose of it at fair market value, which could result in a taxable capital gain.
Opportunity to consider: Loan or give funds to family members to purchase a principal residence.
If you support a child in residence at university or pay rent for elderly parents, consider loaning or giving them funds to purchase a separate residence. This will reduce your investment income subject to tax and, since the funds aren’t earning income, there’s no attribution. Also, if the property increases in value, the family member may be able to use the principal residence exemption.
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 23 Jul 2010.
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