Income Splitting Considerations
Income Splitting is the allocation of income within a family or related group to take best advantage of Canada’s “graduated rates” income tax system.
There are a variety of Income Splitting Considerations that should be considered – there are benefits and risks associated with each, so these must be tailored to individual circumstances – Professional Guidance is critical in this area.
Many of the pitfalls involved in Income Splitting techniques relate to the CRA “Attribution Rules”. These attribution rules are generally broken into different categories with different results based on:
Ø Type of Income:
- Investment income [eg interest and dividends]
- Business Income
- Capital Gains
Ø Relationship of Lender to Recipient:
- Minor Children
- Non-Minor Children
- 3rd Parties
Ø Type of Transfers:
-Interest bearing Loans using CRA “Prescribed Rate”
-Non-interest bearing or low interest bearing Loans
Loans to family members can be completed in order to shift income from a higher taxed individual to a lower taxed individual.
In certain circumstances the loan can be made on an interest free basis, and still achieve this result for certain types of income.
In other circumstances, an interest can be paid annually (at latest within 30 days after the end of the year) between family members using the CRA "Prescribed Rate" and achieve this same shift of income for many other types of income.
Payments From Corporations
Consideration should be given to payments to family or related individuals from Private Corporations including:
v Salaries – Fair value salaries can be paid where the individual performs employee type services for the corporation
v Directors Fees – Directors can be paid fees in order to compensate them for their services
v Consulting Fees – Where non-employee type services are performed for the corporation, consulting fees could be considered
v Loans – amounts which are loaned to family members or other parties from the corporation may be taxable to the individuals to the extent that the terms or repayments are not within CRA guidelines.
v Dividends – in certain circumstances family members can subscribe for shares of private corporations and receive dividend payments from that corporation. Fair value for the shares must be paid by the family members. Common share subscriptions are often combined with a “freeze” of the private corporation. If the articles of incorporation or amendment of the corporation allow for it, Special Preference Shares with no real value could be issued to family members for nominal consideration.
Other considerations – Independent Legal Advice, use of Trusts, Securing of Loans via General Security Agreements [GSA] and Personal Property Securities Act [PPSA].