Canada: Income Splitting to Reduce Income Tax – Calgary Tax Lawyer Analysis

Last Updated: June 5 2017

Income Splitting for Tax reduction

The Canadian Income Tax Act taxes every person separately, unlike some other countries which treat spouses or families as a single unit for tax purposes. The Canadian Income Tax Act also taxes individuals at progressive rates. In other words, as individuals earn higher income, they pay a higher percentage of their income to the government. This progressivity is established through a series of tax brackets. For example, in 2016 the first $45,282 of an individual’s income was subject to a 15% federal income tax rate while an individual’s income over $45,282 but up to $90,563 was subject to a 20.5% tax rate. The tax rate for each province is added to the federal rate. As a consequence of this progressive rate structure, the specific way a fixed amount of income is allocated among a group of taxpayers will affect the total amount of tax paid by the group. This effect is compounded by the fact that each taxpayer has non-refundable tax credits that must be used. Suppose that a husband and wife collectively earn $100,000. If all of that income is earned by the wife, then the couple would end up paying an average federal income tax rate of 27.8%. If each spouse earns $50,000, then the average federal income tax rate would only be 15.5%. The above rates were calculated without including the tax credits available to each spouse. If credits were included even more tax would be saved. If you want more information on opportunities for tax planning by splitting your income to pay less tax, speak with one of our experienced Calgary tax lawyers.

Anti-Income Splitting Rules

The government is well aware of the existence of income splitting and has placed tax planning limitations in the Canadian Income Tax Act that prevent certain forms of income splitting. One set of limitations is the variety of attribution rules present in the Canadian Income Tax Act. The effect of these rules when triggered is to change who earned particular income for tax purposes regardless of who actually receives the income. For example, there are a set of rules that cover situations where a property is transferred between spouses for less than fair market value. The income generated from that property is attributed by the Canadian Income Tax Act to the spouse who transferred the property not the spouse who currently owns the property. If this rule was not in place, spouses would be able to income split by transferring income earning properties to the spouse with the lower marginal rate. This could be done without realizing capital gains through use of the spousal roll over.If you need help determining whether any of the myriad anti-income splitting rules contained within the Canadian Income Tax act apply to you, please speak with one of our top Calgary tax lawyers.

Opportunities for Income Splitting

Despite the fact that the Canadian Income Tax Act contains rules designed to prevent income splitting in some situations, there are many opportunities for tax planning for Canadian taxpayers to split their income with members of their family while maintaining full compliance with the requirements of Canadian income tax law. It is often possible for business owners to arrange their affairs so that they can split income with their spouse and adult children, often through the use of a family trust. Tax planning to arrange your tax affairs to allow you to split your income requires significant care so it is essential to seek advice from income tax professionals before proceeding. If you are interested in exploring opportunities for income splitting, speak with one of our expert Calgary tax lawyers.

The information is thought to be current to date of posting. Income tax law changes frequently and content may no longer reflect the current state of the law. This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

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Useful Resources
Forms available to download for income tax filing in Canada.
Hear David J. Rotfleisch discuss timely and highly topical tax matters during appearances and interviews with specialist publications.
Useful explanatory videos of income tax matters.
The following questions and answers are based on the proposed measures that were announced on December 7, 2015.
The official Government website of the CRA.
This guide is for any person who deals with the Canada Revenue Agency (CRA). The guide gives you information on the 16 rights set out in the Taxpayer Bill of Rights and explains what you can do if you believe that the CRA has not respected your rights.
The Office of the Taxpayers' Ombudsman (OTO) works to enhance the Canada Revenue Agency's (CRA) accountability in its service to, and treatment of, taxpayers and benefit recipients through independent and impartial reviews of service-related complaints and systemic issues.
Ontario personal income tax is an annual tax collected from individuals who are Ontario residents on the last day of the tax year or have income earned in Ontario for the tax year.
The following documents provide instructions for filing your 2015 income tax return.
If you earned income in B.C. or operated a Corporation with a permanent establishment in B.C. last year you need to file an income tax return. Find out when you need to file your income tax return, and if any tax credits or rebates apply to you.
Generally, a corporation must file an Alberta corporate income tax return (AT1) for each taxation year during which it has a permanent establishment in Alberta.
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