Weekly Tax Tip

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: Loan funds to family members other than your spouse to invest in assets that produce capital gains

Consider loaning funds interest-free to low-income family members other than your spouse. They can use the funds to purchase investments with low returns, but with the potential to produce capital gains. Capital gains arising on these investments will not be subject to attribution.

Many mutual funds invest in growth stocks with low dividend rates. Such investments are well-suited for this plan, as any distribution from these funds is often a distribution of capital gains.

If a child's in-trust account or a trust for the child has investments with accrued gains, consider triggering these gains each year to the extent the child's personal exemptions are not otherwise utilized. This will help ensure that the child won't have a large gain that will be taxed at some point in the future.

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 Sept 8, 2014.