As the year draws to a close, tax planning begins to receive
more attention. If you are considering income splitting as a means
to reduce your tax burden, there are a number of factors to
With our system of progressive income-tax rates for individual
B.C. residents, there are nine personal income-tax brackets created
by the federal and provincial tax rates. The highest marginal tax
rate is at 45.8 per cent for taxable income greater than $150,000.
Income splitting or shifting is a form of tax planning designed to
shift income from a person paying tax at a high rate to a family
member paying tax at a lower rate.
Although there are a number of legislative provisions that
prevent achieving tax savings through income splitting or shifting,
there are also a number of legitimate arrangements available to
essentially split or shift income.
These include paying a reasonable salary to your spouse or
children from your business income, use of a prescribed interest
rate loan or pension income splitting. However, these arrangements
require that the individual has a business, has an investment
portfolio or is receiving eligible pension income,
For couples with children, there is now an additional option to
minimize taxes. Last month the federal government announced,
effective for 2014, the Family Tax Cut Credit, which is a new,
non-refundable tax credit that can provide federal tax savings of
up to $2,000 for married couples, including common-law
To calculate the cut credit, the spouses first calculate the
total taxes they would otherwise pay. They must then determine the
combined total taxes on the basis the spouse with the higher income
had notionally shifted 50 per cent of the difference in their
incomes to a maximum amount of $50,000 to the spouse with the lower
income. The difference in combined total taxes under these two
determinations will equal the Family Tax Cut Credit one of the
spouses will be able to claim.
For purposes of claiming the Family Tax Cut Credit for a year,
the individual must be a Canadian resident at the end of the year
and have a child under the age of 18 years who ordinarily resided
with the individual or the spouse throughout the year.
Pension income splitting is another avenue for couples seeking
to reduce their taxes. Many developed countries such as the U.S.,
Germany and France have some form of income splitting. In Canada, a
form of income splitting was introduced in 2007, allowing Canadian
individuals the ability to split up to 50 per cent of certain
eligible pension income with their spouses. Of course, this pension
income splitting is only beneficial to a segment of the Canadian
taxpayer population — married couples where at least one
receives certain eligible pension income.
The Family Tax Cut Credit is also only beneficial to a segment
of the Canadian taxpayer population, that being two-parent
single-family homes. In order to benefit from the credit, the two
parents must be in different tax brackets.
There are other aspects of the Family Tax Cut Credit which makes
it a limited form of income splitting, such as the fact it only has
the ability to reduce federal income taxes payable. Unless B.C.
follows suit, there is no provincial benefit.
Notwithstanding the arguments for — or criticisms of
— the policy and politics behind the Family Tax Cut Credit,
it's a continued step in the right direction for adopting the
concept of income splitting.
Hopefully, pension income splitting and the Family Tax Cut
Credit will form the basis to accomplish the notion of tax fairness
and expand the forms of income splitting to benefit other segments
of the taxpayer population, such as low-income families and single
parents, in the future.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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