Family matters

Income splitting strategies to meet your needs

 
If you are looking at opportunities to reduce your tax bill this year, income splitting – the ability to use the lower tax rates of other family members to decrease the personal tax bills of you and your family – may meet your needs. Below are a few of our favorite income splitting strategies that you and your family can use to reduce tax this year and in future years.
 

Tips for young families:

Use RESPs to save for children’s education

Investment income earned within an RESP is tax-deferred, and since future withdrawals for education are taxable to the child, this means a lower tax bill for the overall family.

Help your spouse maximize their TFSA

Ordinarily gifts between spouses for investment purposes are subject to complex tax attribution rules; however, spouses can gift funds to each other that are then contributed to their TFSA.

Spousal RRSP contributions

A higher income individual can make tax-deductible RRSP contributions for the benefit of their lower income spouse, so that future withdrawals can be taxable at the spouse’s lower rate. 
 

Tips for individuals age 65 and older:

Split eligible income with your spouse

You can split eligible income on your tax return with your spouse. Common examples include: pensions, prescribed annuities, Registered Retirement Income Funds (RRIFs), and Life Income Funds (LIFs).

Share your CPP pension with your spouse

If you and your spouse are eligible for, or already receiving income from CPP, you can apply to share this income by submitting an application available at Service Canada.

Income split your RRSP by converting it to a RRIF

RRSP withdrawals cannot be split with a spouse at any age, but if you are 65 or older, you can convert a portion, or all of your RRSP to a RRIF making those withdrawals eligible for income splitting.
 

Tips for shareholders of private corporations

Pay reasonable salaries to family members

Where you can show that your spouse and/or children have worked in the business, you may be able to pay them a reasonable salary. It is important to track their actual working hours, describe their work tasks, and define the terms of their employment. Wages must be reasonable based on the work performed and the age of the individual (i.e. school aged children).

Pay dividends to shareholders of private corporations over age 65
Despite the expanded “Tax on Split Income” (TOSI) rules for Canadian private corporations as of 2018, private corporations can continue to pay dividends to shareholders in specific situations. For example, in order to ensure consistency with other pension income splitting rules, where the business owner is age 65 or older and their spouse is a shareholder of the corporation, dividends can be paid to the spouse without attracting punitive TOSI tax consequences. If this exception did not exist, the dividend payments may be subject to the TOSI rules, which would tax the payment at the top marginal tax rate, regardless of the spouse’s tax bracket.

 

 

It is important to consult with your tax professional on any of the above income splitting strategies to find the best solution for you and your family.


Contact your Richardson GMP Advisor should you have any questions.