We can plan to shift income, capital, and other taxes to lower earners in the family in a variety of ways. Every family investment planning strategy follows the same basic pattern: first review results for each individual in the family, then the results for the family must be considered. Discuss the following with your tax advisor:
Where income that would be tax currently at a high marginal rate (example, fully taxable payments from a Registered Retirement Savings Plan) can be deferred until a later year when the marginal tax rate would be lower. The tax advantages can be significant, particularly when you view that opportunity within the context of the family unit. Where the amounts can be split between family members, results can often be even better.
Recently governments have been moving towards family income splitting in very limited circumstances. For example, in 2007 it became possible for those who receive certain pension benefits to transfer up to 50% of that income to a spouse if that is to their tax advantage. This will usually provide for tax savings as pensioners take advantage of the progressivity of tax brackets and rates.
It is also possible for business owners to split the revenues they earn by hiring their spouse or children in the business, if they otherwise would have hired a stranger to perform the role. The family member must be qualified to perform the role and actually do so, for reasonable compensation similar to what would be paid to a stranger. In this case, the amounts paid are deductible to the business owner and taxable in the hands of the family member.
This is great tax planning, as it opens up tax advantaged investment opportunities for the family members by creating "room" for contributions to Registered Retirement Savings Plans (RRSPs) and in the case of adults, contributions to the Canada Pension Plan (CPP), and Tax-Free Savings Account (TFSA).
Certain employed commission sales agents may also split income by hiring a family member as an assistant, however the fact that this assistance is required and paid for by the agent must be a condition of their contract of employment.
When it comes to splitting investment income the rules are more complicated, as described below. Passive income from investments is reported each calendar year and, with the exception of rental income, will not create RRSP contribution room. The primary categories of investment income are:
It is important to understand how you might earn these types of income from your investments. If you are still unclear about these terms speak to your advisors so that you can match investment products to income sources.
Notice that capital gains earned on the sale of income producing assets, such as publicly traded shares or a rental property, are not included in this list of investment income sources. A capital gain occurs when an income producing asset is sold for more than its "adjusted cost base." That's your original acquisition value or price plus certain additions or deductions. Only one half of any capital gains are taxable, after you reduce them by any capital losses incurred during the year. This source is in a category by itself.
When assets are transferred to family members, special rules exist to deny the opportunity of income splitting. In effect, any earnings from the transferred property are attributed back to the transferor. Here are the rules:
Recent tough times may provide a golden opportunity to transfer assets - like the family cottage - to adult children, given low market values. This should be discussed with your tax and legal advisors.
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