Sunday, 16 December 2012

INCOME SPLITTING WITH SPOUSE, CHILDREN AND OTHER RELATIVES

As Canadian tax on individuals are at graduated rates it pays to split income with dependent relatives.  The question is whether this exercise is worth it. In order to answer this question we have to look at ones income level, the graduated personal income tax rates and in some cases also at the tax rates of other entities that can be used to enhance the income splitting exercise.  The tax rates applicable to individuals in 2012 starts at about 20% and reaches 46.41% at an income level of about $132,000.  Taking a simple 50:50 split of income between husband and wife -ignoring CPP- tax saving of about $2,000 can be achieved at an annual income as low as $60,000. That is assuming that the $60,000 is earned by one spouse only. Tax the saving increases as income level increases.  At an income of about $265,000 the savings reach to about $18,000 and stays at the same level until incomes exceeds $1,000,000 (for year 2013, $1,018,000) when the Ontario tax of 3% -including surtax - kicks-in.  Remember income splitting threshold of $265,000 drops to about $212,000 if the entire amount of income is dividend income from a Canadian controlled private corporation (CCPC) or even lower if the dividend is paid out of eligible income of a CCPC or a Canadian public corporation.  Eligible income of a CCPC, is active taxable business income not subject to the small business deduction; usually taxable active business income in excess of $500,000. Should you be able to increase the family members to include children over the age 18 the savings increase even more. Splitting an income of $396,000 three ways doubles the saving to about $36,000.  There are other techniques of income splitting using a corporation and / or a trust which could even further enhance tax savings. The above assumes that income is earned by one family member and others have zero income and also ignores personal allowances. Taking personal allowances into consideration tax savings could be more, even at lower income levels. In implementing income splitting strategies one should be aware of income attribution rules and try to get around them.

Get more tax information and Q&A letters from our website www.tavana.ca

This blog is for general information only and cannot replace professional advice. 
The reader is invited to contact the writer to discuss the contents of the newsletter.
 Readers are advised to seek professional advice before acting on the material
 in this newsletter
 

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