For 2016 and subsequent tax years, families can no longer rely on the Family Tax Credit to split their income. So when it comes time to file your 2016 personal tax returns, we will have to look at alternative ways to split income, such as:
For Business Owners
Prescribed Rate Loan:
Setting up a prescribed rate loan where the low income spouse borrows from the high income spouse to invest. The low income spouse must pay the prescribed interest rate (as determined by CRA at the time the loan is setup) on the loan to the high income spouse by January 31 of next year. All income earned from the investments is reported in the low income spouse’s personal tax return. High income spouse simply reports the interest received each year. Today’s prescribed rate set out by CRA is only 1%.
Paying a Salary:
You can choose to pay a reasonable amount of salary to your spouse or low income family members who do work for your business. Since these family members are not at arm’s length, you have to be very careful when you decide to make a payment. Firstly, you have to document all the work that has been performed. Secondly, you have to make sure the amount is reasonable.What is reasonable? It is what you would otherwise pay to an arm’s length person to do the same job. If you were to hire someone you do not know, how much would you pay that person to do the same thing? Having an employment contract in place that outlines the job description is recommended.
Owners of Canadian-Controlled Private Corporations (“CCPC”) can restructure through various estate planning tools to allow family members to share ownership in the company. This provides the opportunity to pay dividends to adult family members. An Alberta resident without any other income can receive about $30,000 in taxable dividends tax free! Many tax planning opportunities are available here. It is advisable to consult a Professional to ensure the proper structure is setup.
Contributing to a spousal RRSP is one of the ways to split income with your spouse. When you make a contribution, ensure your banker is aware that it is for a spousal contribution. Typically, a spousal RRSP is designed for retirement. At that time, it will be converted into a RRIF or an annuity and the income will be taxed in your spouse’s name at their tax rate. However, if your spouse withdraws funds within 3 calendar years of your contribution, that amount will be added to your taxable income in the year of the withdrawal.
A pensioner can split up to 50% of their eligible pension income with their spouse or common-law partner. This is not an exhaustive list by no means, as there are other more complex strategies available. If you wish to consider any of these options, please feel free to contact us to schedule a consultation at 780-488-4011 or firstname.lastname@example.org.