Income Splitting

Income tax policy, rules, problems, strategy and software. Property and consumption taxes too.
BRIAN5000
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Income Splitting

Post by BRIAN5000 »

Circumventing attribution rules
Taggart posted
TMX’s free stock screener fits the bill for Canadians
I've been poking around the TMX site as well and found this that was interesting.

Property transferred between spouses is subject to attribution:
If the higher earner transfers property to the lower earner for investment purposes, resulting income from the investment is taxed in the hands of the transferor.
Exceptions include:
◦Tax-Free Savings Account contributions.
◦Registered Disability Savings Plan (RDSP) contributions.
◦Spousal RRSP contributions.
◦Income resulting from transactions in which bona fide "inter-spousal" loans are drawn up to transfer the capital and interest is actually paid to the lender at least once a year during the year or within 30 days after the year end.
◦Profits resulting from investments in a business, as described above.
◦Transfers resulting from marriage breakdown.
◦Income on property after it is inherited.

http://www.tmxmoney.com/en/knowledge/ta ... pital.html

Income on property that was inherited???

So if the wife inherits a million dollars she can give me $500,000 or any amount and the income earned on it is mine not attributed back to her :)
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
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Springbok
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Re: Income Splitting

Post by Springbok »

BRIAN5000 wrote:Circumventing attribution rules

Property transferred between spouses is subject to attribution:
If the higher earner transfers property to the lower earner for investment purposes, resulting income from the investment is taxed in the hands of the transferor.
Exceptions include:
◦Tax-Free Savings Account contributions.
◦Registered Disability Savings Plan (RDSP) contributions.
◦Spousal RRSP contributions.
◦Income resulting from transactions in which bona fide "inter-spousal" loans are drawn up to transfer the capital and interest is actually paid to the lender at least once a year during the year or within 30 days after the year end.
◦Profits resulting from investments in a business, as described above.
◦Transfers resulting from marriage breakdown.
For a couple, doing the accounting to comply with those attribution rules could be onerous.

Many couples start off life with a joint bank account and put a few $$$ into GICs etc. Later they have few more $$ saved and they open an investment account. Sometimes one partner stops working for a while and then when kids grow, goes back to work. Maybe all or most of his/her income goes into savings. Or perhaps not. Eventually they read FWR or some other source and they find out about attribution rules. Some never do.

I have tried this out on friends and relatives. Some (with more complex lives) know all about attribution and have set up the interspousal loans etc. Others give me a blank stare! Others know about it but say they would be able to justify the 50/50 split they are using (despite not having detailed records)

For an average couple, they could do a LOT of accounting to try and get the attribution right. Then they do their taxes. Both end up in same tax bracket and are allowed to income split!

It is interesting that many of the tax software programs provide a box to simply split joint T-slip income based on a percentage. So presumably many people do that.

It does seem that our tax system should be simplified for the average taxpayer. At least allow joint filing for couples.
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Re: Income Splitting

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Income on property that was inherited???

So if the wife inherits a million dollars she can give me $500,000 or any amount and the income earned on it is mine not attributed back to her
This is the one I was more interested in! If the $500,000 was invested at 5% that's $25,000 that would not be attrubuted back.
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Re: Income Splitting

Post by max88 »

Springbok wrote: It does seem that our tax system should be simplified for the average taxpayer.
Agree 100%.
At least allow joint filing for couples.
I beg to differ. Joint filing itself does not help simply our tax system, it just lowers tax on single-income couples to match that of dual-income couples. Then this brings up the argument of the extra cost (transportation etc.) for dual-income couple to earn the same combined income.

Removing attribution would simply, but it would be looked upon as favoring the rich over the poor, and is politically unpopular. Many dual-income couples both have to work because of lower individual incomes, there is not much left to invest after living expenses; while the "evil" rich can save and invest their surplus, only to get further ahead if attribution is removed.
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Re: Income Splitting

Post by kcowan »

BRIAN5000 wrote:Circumventing attribution rules

◦Income on property after it is inherited.

http://www.tmxmoney.com/en/knowledge/ta ... pital.html

Income on property that was inherited???

So if the wife inherits a million dollars she can give me $500,000 or any amount and the income earned on it is mine not attributed back to her :)
I think they are saying that it will not be taxed back in the hands of the donor, in that case the deceased person's estate.

(See I am starting to think like a CRA beancounter!)
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Re: Income Splitting

Post by Springbok »

BRIAN5000 wrote:
Income on property that was inherited???

So if the wife inherits a million dollars she can give me $500,000 or any amount and the income earned on it is mine not attributed back to her
This is the one I was more interested in! If the $500,000 was invested at 5% that's $25,000 that would not be attrubuted back.
This might help:
Q: "My husband recently inherited a large sum of money upon the death of a distant relative in the U.S. He was executor of her estate. When the money was transferred here, the people at the bank suggested splitting it, with two-thirds invested in my name and a third in his, because he already had pension and RRIF revenue and I didn't. Legally, can the money be divided like this or is there some protocol we must follow?"

A: Accountant Nick Moraitis of Fuller Landau said that, legally, the money can be split between spouses, either as a loan or outright gift, though there could be problems if the intent was to avoid the creditors of the transferor spouse.

For tax purposes, however, the transfer leads to income attribution.

"Although legally the husband can give the $400,000 to his wife, any income she earns with the money will be taxed to the husband," Moraitis said.

What they may want to do is have the husband lend the money to his wife, with interest at the current minimum prescribed rate of three per cent.

"A promissory note should be prepared to prove it is a loan," Moraitis said.

The wife must pay the interest, at least annually, or else the attribution rules apply forever on the loan.

"If it's done properly, any income the wife earns on the $400,000 would be taxed to her and she deducts the interest paid to her husband. He reports and gets taxed on the three-per-cent interest. This method achieves some income splitting."
thanks to Canada.com
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Re: Income Splitting

Post by SQRT »

The income attributions rules ar often misunderstood. They aren't generally dependent on where you originally get the money from, ie an inheritance which would certainly trigger the attribution rules if given to a spouse. One great work around is the spousal loan which currentl is set at 1% minimum rate. This should leave lots of room for income splitting. For retired guys, like me, the pension splitting rules are very useful. Keep in mind that the total max benefit of income splitting is about $15,000 per year, depending on your province of residence. Quite a lot for the average guy but for high earners a more moderate amount. Nevertheless worth a bit of record keeping, In my case both my spouse and I have always earned, and saved our own money. Pension splitting finishes the process so that now we both pay at the max marg rate.
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Re: Income Splitting

Post by BRIAN5000 »

Couldn't find a good thread, this page may be worth book marking if you haven't already. I can't always remeber the numbers.


2013 indexation adjustment for personal income tax, benefit amounts, and the annual dollar limit for Tax-Free Savings Accounts

http://www.cra-arc.gc.ca/nwsrm/fctshts/ ... 1-eng.html
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Re: Income Splitting

Post by ghariton »

SQRT wrote:Keep in mind that the total max benefit of income splitting is about $15,000 per year, depending on your province of residence.
$18,800 in Ontario in 2013 (thanks for linking to the new thresholds, Brian). For that, splittable family income must be at least $270,000. Benefit doesn't look as big as I'd expected it to be.

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Re: Income Splitting

Post by SQRT »

The numbers are more like $15,000 and $150,000 in Alberta ( our province of residence). Many people think the benefits of income splitting are more. The key is that the benefit is capped once both parties are paying at the max marg rate. I would have thought that the benefit would be even higher in Ontario given the recent high income tax increase?
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Re: Income Splitting

Post by couponstrip »

I was just running some numbers on this calculator and I was suprised by the meagre benefit income splitting provides in our circumstance. I always assumed it was a brilliant tax maneuvre based on my accountant's excitement about it, but now I'm wondering if it is worth the effort considering it costs us CPP and EI payments that we otherwise wouldn't pay.

The higher earning spouse's income is self-employment income. The lower income spouse does the books and financial work for the self-employed spouse for which they are paid.

The higher earning spouse remains above the top marginal rate after splitting in our case. I tried various amounts ranging up to 100k.

Are there other benefits of income splitting? RRSP room obviously. Anything else?
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Re: Income Splitting

Post by adrian2 »

couponstrip wrote:now I'm wondering if it is worth the effort considering it costs us CPP and EI payments that we otherwise wouldn't pay.

The higher earning spouse's income is self-employment income. The lower income spouse does the books and financial work for the self-employed spouse for which they are paid.
There is no EI to be paid by the lower income spouse working for a CCPC in which she or her husband control at least 40% of the shares. As for CPP, that's quite far from a dead weight; I'd say it's a pretty good fixed income investment, especially considering the bond yields nowadays.
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Re: Income Splitting

Post by couponstrip »

The lower income spouse (me) doesn't work for a CCPC. I just do the finance work for my spouse and some billing work. My spouse does not have a CCPC.

All my income is retained in my CCPC which is why I have no personal income apart from investment dividends.

Agreed about CPP. Not dead weight, and not a "cost" per se.
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Re: Income Splitting

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couponstrip wrote:The lower income spouse (me) doesn't work for a CCPC. I just do the finance work for my spouse and some billing work. My spouse does not have a CCPC.
AFAIK, you should not be paying EI (i.e., you should be exempt). Ask yourself, if your spouse fires you, would you have a case in hand to go to the EI office and ask for benefits?
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Re: Income Splitting

Post by Serdic »

The relevant sections of the EI Act are 5(2)(b) and 5(2)(i):
EI 5(2) wrote: (2) Insurable employment does not include
...
(b) the employment of a person by a corporation if the person controls more than 40% of the voting shares of the corporation;
...
(i) employment if the employer and employee are not dealing with each other at arm’s length.
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Re: Income Splitting

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Serdic wrote:The relevant sections of the EI Act are 5(2)(b) and 5(2)(i):
EI 5(2) wrote: (2) Insurable employment does not include
...
(b) the employment of a person by a corporation if the person controls more than 40% of the voting shares of the corporation;
...
(i) employment if the employer and employee are not dealing with each other at arm’s length.
If couponstrip has paid EI in past years, he should be able to adjust those returns and get the previous contributions back.
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Re: Income Splitting

Post by Serdic »

The process isn't via a T1 Adjustment.

Instead, if, in any of the prior three years, someone has paid EI and they shouldn't have, they need to complete an Application for a Refund of Overdeducted CPP Contributions or EI Premiums, along with the T4s for each year.

edited to add:
If you have to make adjustments in the current year, then you simply reduce the source deductions in order to recover the EI (or assign it to tax deducted at source when you file your T4).
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Re: Income Splitting

Post by couponstrip »

Thanks for the information. Reviewing my records, it looks like I haven't paid EI in past years, but the accountant has me paying it this year. Obviously an error either the accountant or myself should have caught. Maybe it is time to start doing this myself. :)

Regarding the income splitting, I have run a few more scenerios through the calculator which revealed the answer. As our dividend income from CAD and nonCAD sources (other income) has increased (due to increased savings), the amount of self-employment income that can be split to a tax advantage has decreased. So income splitting is still happening to similiar value as previous years, it's just that the income being split is now from different sources. There is now diminishing tax advantage to splitting the self-employment income, but there remains RRSP room and the value of CPP to consider.

It probably should have been more intuitive. I'll chalk it up to an off week. :)

Does T5/T3 income create RRSP room, or must it be employment/self-employment income?
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Re: Income Splitting

Post by izzy »

For a nice summary of the situation re E.I. see:-
http://www.cadesky.com/public/cad.taxtips.asp?n=12-40
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Re: Income Splitting

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couponstrip wrote:Does T5/T3 income create RRSP room, or must it be employment/self-employment income?
No, T5s and T3s do not create RRSP room. It has to be income on account of employment or self employment (includes net rental income). The relevant portion of the Income Tax Act is 146(1).

Federal Income Tax Fundamentals. Ch. 9 Para 350 wrote: If an individual was a resident of Canada throughout the year, earned income, as defined will include the individual’s income for a period in the year throughout which the individual was a resident in Canada from:

● an office or employment, generally including all taxable benefits, less all employment related deductions, but not including any deduction for RPP contributions, employee contributions to a retirement compensation arrangement (RCA) or a clergyman’s residence;

● a business carried on by the individual either alone, or as a partner actively engaged in the business;

● property, when derived from the rental of real property or from royalties in respect of a work or invention of which the individual was the author or inventor;

● support payments included in computing the individual’s income;

● an amount included in income from supplementary unemployment benefit plans, net research grants, and support receipts in computing the individual’s income; and

● the amount of disability pension received after 1990 by an individual under the Canada or Quebec Pension Plan;

less the total of the individual’s loss or deduction for a period in the year throughout which the individual was resident in Canada from:

● a business carried on by the individual either alone, or as a partner actively engaged in the business;

● property, where the loss is sustained from the rental of real property; and

● support payments deductible in computing the individual’s income.

For the purposes of determining the earned income of such an individual, the income or loss of the individual for any period in a taxation year is the individual’s income or loss computed as though that period were the whole taxation year.

Note that earned income does not include superannuation or pension benefits (including CPP/QPP and OAS benefits), retiring allowances, Employment Insurance benefits, death benefits, amounts received from an RRSP or taxable benefits from a DPSP or a revoked plan. It also does not include investment income, taxable capital gains, or scholarships and bursaries.
So, the only way to earn RRSP (and pay CPP) room is to work for someone or make money working for yourself.
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Re: Income Splitting

Post by BRIAN5000 »

Income splitting question

This may be like a Brian Costello thing looks like it may work at first glance but when you get into the details very few people could do it or be in the situation where it would be useful.

Highest net worth individual also highest income earner funds an annuity for the lower income spouse.
This may work for a stay at home mom that has no CPP, DB, family income to high to qualify for GIS (?).

All income from the annuity would be the lower income spouses no attribution?
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Re: Income Splitting

Post by izzy »

BRIAN5000 wrote:Income splitting question

This may be like a Brian Costello thing looks like it may work at first glance but when you get into the details very few people could do it or be in the situation where it would be useful.

Highest net worth individual also highest income earner funds an annuity for the lower income spouse.
This may work for a stay at home mom that has no CPP, DB, family income to high to qualify for GIS (?).

All income from the annuity would be the lower income spouses no attribution?
Interesting! I assume you are referring to an annuity bought with non-registered funds?
Depending on their ages would such annuity income qualify as pension income and therefore eligible for pension splitting?
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Re: Income Splitting

Post by brucecohen »

ISTM the taxable income from the annuity would be attributed to the higher income spouse who funded the purchase. He/she could then have half taxed in the spouse's hands under pension income splitting. Same result as if the higher income spouse purchased the annuity, though might be useful if the lower income spouse is likely to live much longer.

Would probably be better for the higher income spouse to lend the other the money for the annuity with interest fixed as CRA still-low prescribed rate. All taxable annuity income is then the spouse's. Lower income spouse would have to pay interest to the other and that person would have to pay tax on the interest, but at today's rates the amounts would be small. The interest would also be deductible for the lower income spouse. Pension income splitting would not apply in this case and there'd be no need for it.

Since this is unregistered money the product to buy would be a prescribed annuity that levels the blend of taxable interest and tax-free capital return.
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Re: Income Splitting

Post by twa2w »

ISTM a non-registered annuity would not qualify under the pension splitting rules. This would only apply to an annuity purchased with registered funds.
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Re: Income Splitting

Post by brucecohen »

twa2w wrote:ISTM a non-registered annuity would not qualify under the pension splitting rules.
It does if the annuitant is 65 or older. See here.
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