Income splitting involves moving income from the hands of one family member to another resulting in tax savings. The tax savings arise because each taxpayer resident in Canada is entitled to the basic personal tax credit. As well, we have a progressive rate system, meaning that the lower your income, the lower the rate of tax you’ll pay.
When two people each pay tax on $50,000, the total tax paid result is less tax than one person paying tax on the full $100,000. If all family members are in the highest tax bracket, then shifting income from one person to the next is not effective, but if any family members are in a lower tax bracket due to a lower level of income, splitting income can be advantageous. We expect that the Conservative government will allow parents with dependent children to split their income for tax purposes detailing this in the upcoming mini budget. Seniors are already able to split their pension incomes.
In Canada we currently have attribution rules that will attribute the shifted income, and the taxes payable, back to the original recipient of the income. However there are legitimate exceptions that may be taken advantage of. Two of the popular scenarios are money lent or given to a family member for business purposes, and money lent to a family with a fair rate of interest charged. We will keep you up to date on any changes as the budget is released.