The main idea behind income splitting is to transfer assets to low-income family members to enable them to earn income. When income splitting, you must be cautious of the attribution rules that may potentially apply whenever a property is transferred or a loan is made at little or no interest to a family member. Where the attribution rules apply, income will generally be attributed back to the transferor or lender, rather than being taxed in the hands of the low-income family member.
Only income from property is subject to attribution. Income from a business is not. If your spouse has a promising business venture, you can provide interest-free financing without any attribution. If the venture is risky, you should consider that an interest-free loan would not qualify for capital loss treatment should the venture fail. If this is the case, you might want to make a capital contribution to the business as a partner and share in the start-up loss. When the business becomes profitable, you can make interest-free loans to the business for further expansion. A gift could also be used to finance a new venture. Your spouse's share of profits from the venture can be invested by your spouse and would not be subject to income attribution.
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 September 26, 2016.