This document has been updated on October 24th, 2017 and reflects the state of the Law, including draft amendments, at that date.

Income Splitting

Income splitting involves sharing an individual’s income amongst family members in order to take advantage of lower tax rates and reduce the amount of income taxes payable.

Pension Income Splitting

See Section VIII.

Other Income Splitting Provisions

There are a number of provisions that attempt to prevent income splitting. Certain attribution rules ensure, for example, that a taxpayer’s income that was to be split by transferring an income-producing property to a spouse or a child, is attributed back to the transferor and included in that individual’s income. However, there are still certain income-splitting opportunities, provided they are properly structured, that should be considered, in particular:

  • Gifts or loans to a spouse or children to enable them to carry on their own business. There is, however, a provision to discourage this type of splitting with minor children in situations where the business is carried on by the parent instead of the child;
  • Gifts and non-interest bearing loans made to a child and used to acquire property that generates a capital gain;
  • Gifts to adult children, regardless of the use they make of it. However, as a gift of property, it may result in a capital gain and recapture of capital cost allowance for the donor;
  • Income earned on attributed income. Thus, if a parent makes an interest-free loan of $20,000 to his/her child and the child earns interest of $1,000 on the amount loaned, the income will be attributed to the parent. However, if the child reinvests the $1,000 and earns $50 on the reinvested amount, the $50 will be taxed in the hands of the child;
  • The payment of a reasonable salary to a spouse or children;
  • An estate freeze under certain circumstances (Section XI).

    Take advantage of relatively low prescribed rates (1% in June 2017) to lend money to your spouse at that rate; rules to discourage splitting do not apply to such a loan.

Minor Children – Tax on Split Income

The following income received by minor children is taxed at the highest marginal tax rate rather than the normal progressive rates:

  • Dividends or other benefits received on unlisted shares owned directly or through a trust or partnership;
  • Income earned from a partnership or trust where the income is derived:
    • from a business carried on by a relative of the child or in which the relative participates or from leasing property to such a business;
    • from a business or rental property, when one of the child’s parents is actively involved in this activity or is a partner of a partnership that earns such income.
  • A capital gain realized directly or through a trust, where there was a disposition of shares of a corporation to a person who does not deal at arm’s length with the minor, if taxable dividends on the shares are subject to the tax on split income.

However, income from property acquired on the death of a relative is not covered by this provision.

Proposed measures

On July 18, 2017, the Canadian Finance Minister proposed measures to counter taxpayers’ income splitting strategies. In short, the measures propose to broaden the tax on split income rules to:

  • Have the tax apply to adult individuals who receive such income (“split income”) from a business in which a family member is a manager or a shareholder, to the extent that such income is unreasonable under the circumstances.
  • Include new types of income in split income: interest income from certain debts, compound income (i.e. income on split income), capital gains on the disposal of certain property to a non-arm’s length individual.

At the date of updating this document, the final version of the measures was not released. However, based on the information available at this time, it seems that many of the family income splitting strategies will no longer be applicable as of 2018.