Section 2 – Individuals and Families
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 personally carry on a business. There is, however, a provision to discourage this type of splitting in situations where the business is carried on by a spouse, a parent or another person related to the individual;
- Gifts to adult children, depending on 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 (see Section XI).
Take advantage of relatively low prescribed rates (2% in the third quarter of 2019) to lend money to your spouse at that rate; rules to discourage splitting generally do not apply to such a loan.
Tax on Split Income
Generally, as a result of the tax on split income rules the income and capital gains received by an individual from a related business are taxed at the highest marginal tax rate rather than the normal progressive rates. The following amounts are generally considered split income subject to this tax, unless they qualify as “excluded amounts” for this purpose:
- A dividend or other benefit from shares of a private (unlisted) corporation 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 person related to the individual,31 a relative of the child;
- From a business in which the person related to the individual is a shareholder or from leasing property to such a business;
- From a business or rental property, when a person related to the individual is actively involved in this activity or is a partner of a partnership that earns such income.
- Interest income from certain types of debt issued by a private corporation, a partnership or a trust;
- 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.
The tax on split income does not apply to wages received by an individual or income or gains from certain inherited property.
The main “excluded amounts” that are not subject to the tax on split income include the following:
- A capital gain from the disposition of property that qualifies for the capital gain exemption (see Section VII) or from the deemed disposition on an individual’s death (see Section XI);
- Amounts derived from property acquired in a separation or divorce settlement;
- For individuals aged 18 or over:
- Income from a business in which the individual is actively engaged on a regular and continuous (that is, an average of at least 20 hours of work per week) during the year or five previous taxation years;
- An amount that is a reasonable return in respect of the individual’s contributions to the business;32
- For individuals age 25 or over amounts from excluded shares owned directly by the individual, that is shares representing 10% or more of the votes and value of a private corporation other than a professional corporation or a corporation that derives 90% or more of its income from the provision of services.
The tax on split income rules are complex. If you earn income directly or indirectly from a business in which someone you are related to is involved, do not hesitate to consult a tax specialist to verify whether this tax applies to you.
31 That is, generally, a spouse, parent or other member of the individual’s immediate family.
32 This criteria is more restrictive for individuals 18 to 24 years of age.
This document is up to date as of September 3, 2020 and reflects the status of legislation, including proposed amendments at this date.