Income splitting has always been an attractive but complicated way of reducing your taxes. Canadian tax laws are designed to ensure that family members cannot easily reduce their tax liability by splitting their income and allowing each spouse take advantage of their personal marginal tax brackets. Despite these strict laws, there are some effective ways, still available, that taxpayers can successfully split their income.

In recent years a common way of income splitting was through income splitting loans. One spouse, “the lender”, would make a loan to the other spouse, “the borrower”, to make an investment. Through that investment the borrower could earn the income that the lender would have earned had he invested himself. However, to ensure that no income is attributed back to the lender, the borrower has to pay the lender interest on the loan that he received. The interest income earned by the lender would be included into the income and the interest paid by the borrower would be deducted from income in their respective tax returns. The Income tax act specifies that the amount of interest has to be at least equal to the prescribed rate at the time the loan was finalized. As the prescribed rate has been 1% over the past years it is an ideal form of income splitting.

 

For more information contact:

Shawna Bratin, MTax, CPA, CA
Tax Specialist
Tél: 514-842-3911 extension 278