To receive additional discretionary income (without having to earn more) involves making beneficial life style choices and decisions so that your family pays less income taxes overall.  This should be your mantra for additional wealth gathering – how can I use income splitting? 

The opportunities to save on taxes exist because there are progressive income tax rates.  The taxes collected by the government are determined by which tax brackets you are taxed at.  Often one spouse is in a higher tax bracket and pays more taxes to the government for each taxable dollar.  A lifestyle change/choice must be made to (legally) transfer taxable income from the higher taxed spouse to the lower taxed spouse.

Revenue Canada Agency has rules to try to prevent income splitting and the reason is obvious.  If you find a way – you pay less income tax.  There are rules against paying your spouse more than fair market value for work done, or for paying for work they did not do, or payments made to the spouse instead to the person who did the work.  Income from investments and properties are also taxable to whoever paid for it, not the person with the lowest tax bracket, nor can it be split between them unless they both have invested in it and according to percentages of input.  

Money simply cannot be given to the other spouse for investment purposes unless loaned at a minimum set prescribed rate.  The interest charged is taxable to the lender.  the interest must be paid each year or by the following January 30th or the arrangement is considered cancelled with all income attributed back to the lender for the current year and all future years.  The interest paid to the higher income spouse is a tax deduction for the lower income spouse.

Transferring income from the higher income spouse to the lower income spouse can only be done with investment income, business income, rental income, commission income, and capital gains.  Also if you’re required by your contract of employment to pay for an assistant or substitute you could deduct a spousal salary from your income.  To use income splitting you must follow correct procedures which means learning to make life style changes that allows the income splitting to occur.

Income splitting often should be use in conjunction with other available Income Tax Act benefits and/or legal entities.  Use income splitting in conjunction with disability savings plans, registered education savings plans, RRSP’s, Tax-free Savings Accounts, charitable donations, and businesses, for synergy results.

Income splitting with your minor children is another avenue to proceed in, that can greatly benefit your children for greater success in life.  Combined income splitting with teaching and setting up your children for; responsibility, investing, saving, education, business, and goal setting so that as a parent they gain your wisdom, knowledge and direction.  At the same time you pay less income tax and the wealth of the family is increased.  There are special rules you can use to allow for capital gains to be earned by minor children which will not be taxable to the parents.

Income splitting also means finding ways to give funds to your children that can be used to earn tax free income.   This is achieved because the personal tax credit allows for a substantial income levels before there is a burden of paying taxes.  Money gifts for birthdays, special occasion and government child tax benefits can be given to children so the income earn will be non-taxable to the parents because the funds are considered to be the child’s own.

Devious creative methods to circumvent the attribution rules such as using substituted property, back-to-back loans, guarantees, transfers to a trust, and other transactions that are not in accordance with the Income Tax Act have special anti-avoidance rules to prevent from them being creditable and thus disallowed.  There is also the General anti-avoidance rule that allows the tax department to disallow the transactions used because it was set-up to avoid paying taxes and is not reasonable, or not based on a true intention, or on justifiable merit, or is a favourable transaction between related parties or friends, or is a non-business transaction in nature.

Blogs to learn how to make the life style changes and choices that will allow income splitting will be featured on later dates.